UK economy ekes out growth in first quarter but March drop underscores fragility

Britain's economy grew 0.1 percent in the first quarter after narrowly avoiding recession last year, official data revealed Friday, as output continues to be hit by high inflation and strikes.

After gross domestic product advanced 0.5 percent in January, output flattened in February and slid 0.3 percent in March, the Office for National Statistics said in a statement.

"The fall in March was driven by widespread decreases across the services sector," noted ONS director of economic statistics, Darren Morgan.

"Despite the launch of new number plates, cars sales were low by historic standards - continuing the trend seen since the start of the pandemic - with warehousing, distribution and retail also having a poor month," he added.

The data comes one day after the Bank of England forecast that the UK economy would avoid recession this year despite the country's annual inflation stuck above 10 percent.

With consumer prices continuing to rise at a fast pace, the BoE on Thursday hiked its key interest rate by a further quarter-point to 4.5 per cent.

It was the central bank's 12th increase in a row, putting the rate at the highest level since the global financial crisis in 2008.

Elevated inflation is eroding the value of workers' wages, causing mass strikes across Britain, the latest being stoppages on the railway network Friday.

"The UK appears to be stuck in limbo. 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," Jonathan Moyes, head of investment research at Wealth Club, commented.

"Nonetheless, whilst strike action continued to affected 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."

Britain's economy remained 0.5 per cent smaller than in the fourth quarter of 2019, shortly before the coronavirus pandemic -a weaker rebound than any other major advanced economy.

"With the key services side of the economy continuing to slow in the face of higher borrowing costs and rising prices, it still feels like we’re walking through treacle," said Tom Stevenson, personal investing director at Fidelity International.

"With inflation still in double digits, it feels depressingly like a re-run of 1970s stagflation."

Output in March was only 0.1 per cent higher than in February 2020, the last full pre-pandemic month.

"A weaker economy in March underscores its fragility despite a fall in wholesale energy prices, improving supply chain conditions, and consumer confidence that has also recovered from multi-year lows," KPMG economist Yael Selfin said.

"While recession is probably no longer on the cards, vulnerabilities resulting from higher borrowing costs and tighter credit are likely to dampen business and household activity this year."