The economy shrank unexpectedly in April amid spiraling commodity prices, rising interest rates and record fuel costs. Experts say the data is now approaching the “cocktail of challenges” facing the UK, with the possibility of further problems as trade relations with the EU deteriorate. Official figures show that the UK’s gross domestic product (GDP) – a measure of total goods and services – fell 0.3 percent in April, following a 0.1 percent contraction in March and zero growth in February. . Markets reacted strongly to the news, with London’s FTSE 100 index of top stocks falling 1.5 percent and the pound falling 1.5 cents against the dollar. The pound was trading at $ 1,216 when the London Stock Exchange closed for the day. Across the Atlantic, Wall Street screens glowed red as the S&P 500 reopened, losing 2.4 percent of its value in morning trading. The index is now in bear market, having lost one fifth of its value from the recent high reached in January. The technology Nasdaq has now lost more than 30 percent of its value since its recent peak. High-tech stocks such as Peloton and Zoom have risen in recent weeks, recording huge gains in the first part of the pandemic. The sell-off came as central banks raised interest rates in a bid to cool the economy and slow prices. Fears are growing that central banks will have to act more aggressively, otherwise inflation will soon be difficult to control. In April, domestic energy bills in the UK rose by 54% at the same time as workers were hit by a rise in national insurance. Meanwhile, food and fuel prices have risen after a major supply disruption following the Russian invasion of Ukraine. The Office for National Statistics (ONS) said Monday that the UK’s GDP was now 0.9 per cent above pre-pandemic levels but 0.4 per cent below its January high. Experts expected a 0.1% increase in GDP in April. The ONS said it was the first time GDP had fallen for two consecutive months since March and April 2020, when the pandemic struck for the first time and drove the economy into recession. The category “Human health and social work activities” was the main factor that contributed to the reduction of economic production (ONS) Production shrank by 0.3 per cent in the services sector, which accounts for more than three-quarters of the UK economy. This was largely due to the end of the government program Covid-19 Test and Trace and the lower vaccination activity. The end of free trials reduced GDP by 0.5 percentage points. By eliminating the effects of testing and traces and vaccines, production would have increased by 0.1 percent in April, the ONS said. Activity also declined in the other two major sectors of the economy. Manufacturing shrank by 1 percent as companies said they were hit hard by sharp price increases and procurement delays. Construction production decreased by 0.4%. Last week, the OECD group of rich countries made predictions that the UK would fall behind any other developed economy except Russia next year, as growth falls to zero. Analysts were divided on whether the UK would avoid a recession, defined as two consecutive quarters of negative economic growth. Martin Beck, chief financial officer of the EY Item Club, said the outlook was bad. “An already severe squeeze on household spending will be adversely affected by the inflationary impact of global supply chain friction and the recent weakness of sterling,” he said, adding that UK interest rates are likely to rise again later this week. The Bank of England is set to announce its latest interest rate decision on Thursday, with markets expecting a further rise. The Bank’s Monetary Policy Committee seeks to reduce inflation, which is projected to reach 10% later this year, well above the 2% interest rate target. Further increases will further burden household budgets and are expected to slow down consumer spending, which will burden the wider economy. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said private sector activity had helped offset the sharp drop in Covid-related government spending and a “renewed weakness” in manufacturing. However, a recession remains unlikely, he said. “The actual disposable income of households should increase in both the third and fourth quarters now that the chancellor has announced an additional 5 5 billion in grants during these quarters, equal to almost 2 per cent of their potential income in these quarters. “Therefore, provided that energy prices do not rise further and households start to pump their savings carefully, we expect quarterly GDP growth of about 0.6 percent in the third quarter and 0.5 percent in the fourth quarter.” , he added. .
