ONS: UK economy shrank 0.3% in March

The UK economy grew slightly in the first quarter of the year but underperformed in March, figures from the Office for National Statistics show.

The ONS recorded gross domestic product (GDP) grew 0.1% in the first three months of 2023. But in March the economy shrank by 0.3% due to a fall in the services and retail sectors as the cost of living crisis hurt consumers.

The GDP data follows the Bank of England’s (BoE) latest base rate announcement, where it also released fresh forecasts for the economy in which it upgraded its outlook for the UK’s GDP over the coming year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The BoE had previously predicted the UK would enter a year-long recession, but it admitted the economy had “turned out to be more resilient” than expected, and that it no longer expected the UK to enter a recession at all.

Instead, it expects the UK economy will grow 0.25% this year.

What is affecting UK GDP growth?

The services sector fell 0.5% in March and was the main contributor to the fall in monthly GDP. The biggest fall was recorded in vehicle sales, but the arts, entertainment and recreation sector posted the most growth. Real estate activities also posted growth.

Output in consumer-facing services fell 0.8% in March following growth of 0.4% in February due to widespread industrial action.

But the production sector output grew 0.7%, the strongest monthly growth since May 2021. Manufacturing also grew 0.7%, and was the largest contributor to growth for the month.

Where next for the UK economy?

“The UK appears to be stuck in limbo,” says Jonathan Moyes, head of investment research at Wealth Club. “This is the third broadly flat quarter for GDP in a row. Whilst the data suggests the UK is performing far better than most expected last year, it remains a challenge to reconcile how the UK economy can escape a recession after such a steep rise in interest rates.

“Nonetheless, whilst strike action continued to affect the data, particularly for services, manufacturing and construction are clearly pockets of strength. If confidence surveys are to be believed, there has been a notable uptick in services in April, which may give a boost Q2 numbers.”

The economy should also be helped by forecasts of falling energy prices as well as increased household spending, says Sophie Lund Yates, lead equity analyst at Hargreaves Lansdown.

But still, challenges remain. “There’s no sugar coating the fact that growth remains very sluggish – the UK is hardly on course to shoot the lights out this year. The main issue is that inflation is set to fall more slowly than expected, partly because of the unprecedented rise in supermarket prices,” she adds.

Indeed, the BoE expects inflation to remain above its 2% target until 2025 and indicated the prime minister’s promise to halve inflation by the end of the year looked tough in the face of sticky food inflation.

“The labour market also remains very tight, and high levels of job security makes for more money pumping around the system,” continues Lund-Yates. “This all leads back to the fact interest rates will have to rise again to bring inflation in line. As things stand, the average household may have to pay £200 extra a month on mortgages, and that could have real implications for the housing market, and by proxy, banks and housebuilders, in the not-too-distant future.”