U.K. Economy Contracts 2% in First Quarter, Biggest Drop Since Financial Crisis

The UK economy contracted by 2% in the first quarter, the most in over a decade, due to the partial disappearance of snow caused by a “Beast from the East” – which economists have described as a “protracted winter surprise” – and trade disputes between the U.S. and the rest of the world.

The contraction will increase pressure on the Bank of England to raise interest rates sooner than later. Policymakers only recently began to feel comfortable raising borrowing costs following the U.K.’s vote to leave the European Union.

The Bank’s policymakers had already hiked rates one and a half percentage points over the last year before postponing further action earlier this year after a series of ugly data.

“The decline in GDP was broad-based, with every sector of the economy contracting,” said Howard Archer, chief economic adviser to the EY ITEM Club, an economic consultancy. “Significantly, the main factors behind the drop in GDP were temporary factors — the Beast from the East, and the related disruption to business investment and consumer spending during February and March.”

The British GDP fell to a level below the average of the previous five quarters at £155.6 billion (USD 190.5 billion), according to the Office for National Statistics. That means the economy is on a downward path that is “set to reduce gross domestic product by around £23 billion or 0.6% annually,” Archer added. “The data imply that the economy would have enjoyed growth of around 1.5% over the course of 2018 had the adverse weather not caused the poor weather in February and March.”

However, GDP was revised down from an originally reported 1.2% for the fourth quarter.

Rising inflation, stemming from the pound’s 50% fall since the 2016 Brexit vote, was the primary cause of the slide in the GDP, said Paul Hollingsworth, UK economist at Capital Economics. The inflation rate has risen to 3.1% in May, from 2.9% a year earlier, according to the ONS.

The first quarter contraction might be an early sign that the economy is facing a slowdown, Hollingsworth said. “The resilience of the recovery over recent years is likely to weaken further over the course of the year,” he added.

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