UK economy shrinks as cost of living crisis bites

The UK economy unexpectedly shrank in April as soaring energy costs and supply chain disruption dragged down manufacturing amid the cost of living crisis, while the winding-down of the NHS test-and-trace service dragged on growth.

In figures highlighting the growing risk of recession, the Office for National Statistics said gross domestic product (GDP) fell by 0.3% on the month, after a 0.1% decline in March as consumers reined in their spending amid soaring household energy bills.

The scaling-back of the government’s Covid vaccination programme and pandemic test-and-trace was the biggest contributor to the monthly fall. Excluding this effect the economy probably grew, although analysts warned there were signs of weakness elsewhere as shortages of key materials and surging costs weigh on activity.

“[Monthly GDP] wasn’t as weak as it looks, but it nonetheless increases the chances that the economy is slipping into recession,” said Paul Dales, the chief economist at the consultancy Capital Economics.

City economists had forecast modest growth of 0.1%. Growth over the three-month period to the end of April came close to stalling at 0.2%.

UK GDP chart

The latest snapshot showed the three main sectors of the British economy – the service sector, industrial production and construction – shrank for the first time since January 2021 during the nationwide Covid lockdown.

Manufacturing suffered as companies struggled with soaring fuel and energy prices and international supply chain problems, dragging down industrial production by 0.6%. Construction also fell 0.4%, after strong growth a month earlier when builders benefited from significant repair activity after storms in February.

Services sector chart

Output in consumer-facing services rose 2.6% in the month, reflecting growth in spending on hairdressing and food services. However, the sector remained below pre-pandemic levels in a sign of the significant damage sustained by businesses during shutdowns and restrictions.

The figures come amid growing concern over the strength of the economy as Boris Johnson’s government battles with internal Conservative party divisions over the best way to respond to faltering growth and the rising cost of living.

Rachel Reeves, the shadow chancellor, said: “These figures are extremely worrying and will add to the concern families are still feeling about their own finances and the long term health of our economy.

“Instead of properly addressing the structural weaknesses and insecurity they’ve created, all the Conservatives use are sticking plasters.”

Rishi Sunak, the chancellor, said the government had a plan to boost the economy and was supporting people with rising living costs. “Countries around the world are seeing slowing growth, and the UK is not immune from these challenges,” he said.

Despite the squeeze on households from a record rise in gas and electricity bills in April, lifting inflation to the highest level since the 1980s, the ONS said retail sales grew on the month.

Analysts said the economy was in a stronger position than the figures suggested because of the significant contribution from the NHS test-and-trace service. “If we strip that out, the headline 0.3% decline in monthly GDP should actually have been marginally into growth territory,” said James Smith, an economist at the City bank ING.

The ONS said test-and-trace cut 0.5 percentage points from GDP growth in April as the government scaled back activity, based on estimates for the cost of the services if they were given a market price.

“Just as health-related spending gave the level of GDP an artificial boost last year, helping the economy appear to recover to pre-virus levels more quickly than it actually had, these categories are now making the picture look superficially worse,” Smith added.

However, business leaders warned the overall outlook remained weak as soaring inflation weighs on households and companies, alongside pressure on exporters as the dispute over the Northern Ireland protocol intensifies.