The UK economy is at the bottom of the G7 growth league behind Germany, France and the US after an unexpected contraction of 0.3% in March.
A strong performance in January meant the economy grew by 0.1% over the first quarter, the Office for National Statistics (ONS) said, but was unable to prevent the UK economy being 0.5% smaller than it was in 2019 before the Covid-10 pandemic.
In contrast, the US economy is 5.3% larger than its pre-Covid size, France’s economy is 1.3% larger, and Germany is 0.1% smaller than in Q1 2019.
The slump in March was driven largely by weakness in the retail sector with consumer spending squeezed by the cost of living crisis. The wet weather also dampened demand.
The sluggish start to the year was likely to concern the chancellor, Jeremy Hunt, who said the UK remained on course to be a “high-growth economy”.
Analysts said the UK faced a difficult situation going into the summer, with millions of households finding that lower gas prices will be offset by higher income taxes and a rise in mortgage costs after a 12th consecutive interest rate rise by the Bank of England on Thursday.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said the Bank’s decision to raise interest rates to 4.5% “may soon look like a misstep”.
He added: “The likely squeeze on consumer spending and investment from higher taxes, and the lagged impact of rising interest rates, may mean that our growth prospects are weaker than the Bank of England currently expects.”
Some analysts have predicted the economy will contract in the second quarter of the year, although the Bank said in its latest forecasts that the economy was likely to avoid a downturn in every quarter of 2023.
The central bank, which increased interest rates to 4.5% on Thursday, has forecast that the UK economy will stagnate this year – expecting growth of 0.25% – after tearing up a forecast last year that Britain was on course to suffer one of the longest recessions on record, stretching into 2024.
Bank officials said inflation, which stood at 10.1% in March, will fall steeply over the summer, but only to 5.1% on average in the last three months of the year, still well above its 2% target.
Labour and unions have accused the government of holding back growth with a return to austerity measures before households and businesses have recovered from the shock of the pandemic and rising energy and food prices after the war in Ukraine.
A few months ago, economists feared the UK could be in recession by now. However, the fall in energy prices has helped the economy outperform those gloomy expectations.
Plans by the government to restrict Whitehall spending appear to be having an effect after the ONS said the education, health, public administration and defence sectors all experienced declines in activity.
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Warm weather in February cut the demand for gas and heating oil, causing the energy sector to register no growth over the quarter.
The ONS said that “consumer-facing services” contracted by 0.4% and household spending overall flatlined over the first quarter.
Building firms increased output over the first three months of the year by 0.7% but the ONS said this was driven mainly by an increase in repairs and maintenance work and was offset by a 1.9% drop in new work.
The ONS added that strikes played a part in restricting growth over the quarter. It said: “There was anecdotal evidence, reported on monthly business survey returns, to suggest that industrial action in March 2023 had a notable impact on different industries of varying degrees.
“These included the health sector (junior doctors), the civil service, the education sector (teachers and university lecturers) and the rail network. This is further supported by the Business Insights and Conditions Survey (BICS), which stated one in 10 businesses (9%) were directly or indirectly affected by industrial action in March 2023.”
Hunt said: “It’s good news that the economy is growing but to reach the government’s growth priority we need to stay focused on competitive taxes, labour supply and productivity.
“The Bank of England governor confirmed yesterday that the budget has made an important start but we will keep going until the job is done and we have the high wage, high growth economy we need.”