UK avoids recession with 0.1% growth in Q1

GDP fell by 0.3% in March, lower than the 0.0% expected, setting the economy up for a more subdued Q2.

Related topics:  Finance News
Rozi Jones | Editor, Barcadia Media Limited
12th May 2023
high street banks
"Only yesterday the Bank's Monetary Policy Committee forecasted broadly flat growth, a far more positive outlook than the 0.4% decline anticipated earlier this year."

The UK economy increased by 0.1% in Q1, according to the latest quarterly estimate of GDP from the ONS.

This follows growth of 0.1% in the previous quarter. The level of quarterly GDP is now 0.5% below its pre-coronavirus level in Q4 2019.

On a monthly basis GDP fell by 0.3% in March 2023, following an increase of 0.5% in January and no growth in February.

In output terms, the services sector grew by 0.1% on the quarter driven by increases in information and communication, and administrative and support service activities; elsewhere, the construction sector grew by 0.7% while the production sector grew by 0.1%, with a 0.5% growth in manufacturing.

Marcus Brookes, chief investment officer at Quilter Investors, said: “As the Bank of England rips up its recession forecast for the UK economy, it will be breathing a sigh of relief this morning as latest figures confirm the UK returned to growth with a 0.1% uplift in GDP in the first quarter of 2023. For now, recession continues to be avoided, though for many this will be little in the way of comfort given the cost-of-living crisis they have had to endure.

“However concerns remain about the resilience of the economy with March figures reporting 0.3% fall as the UK economy remains on the resuscitation table and continues to lag developed peers. While avoiding a recession should be welcomed, the alternative isn’t exactly something to get excited about unfortunately.

“Just yesterday the Bank of England hiked interest rates yet again, and given inflation remains sky-high it is not yet clear whether the Bank is nearing the end of its hiking cycle. Inflation is expected to drop in the coming months which may allow for a pause, but the fact that the economy seems to be holding up in the face of rising interest rates means we may be some way away from the possibility of cuts. Ultimately, the Bank of England has to weigh the delayed impact of prior rate rises which will not be hitting yet. It continues with the tricky balancing act of understanding how much more it needs to do to reduce inflation without tipping the economy nearer a recession, given the well-known lags of monetary policy.”

Jonathan Moyes, head of investment research at Wealth Club, commented: “It was another weak month of data for the UK, the dominant services sector diluted stronger performance from manufacturing and construction. A fall of 0.3% was lower than the 0.0% expected.

"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.

"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.”

Derrick Dunne, CEO of YOU Asset Management, added: "The UK economy grew by a modest 0.1% in the first quarter of 2023 despite ongoing cost-of-living challenges. The real story today however is that the monthly reading - covering March - showed a 0.3% fall, setting the economy up for a more subdued Q2.

"There was always going to be a slowdown in economic activity given the historically fast pace at which the Bank of England has been tightening monetary policy, so the monthly reading doesn’t give immediate cause for concern. When the Bank's measures eventually bring inflation under control, we should see a reversal in the rate hiking cycle and attention turn to restoring economic stability.

"Only yesterday the Bank's Monetary Policy Committee forecasted broadly flat growth, a far more positive outlook than the 0.4% decline anticipated earlier this year. This means that things are already moving in the right direction, albeit very slowly.

"While the true picture will become clearer as we move through the year, our key message to investors is to stay positive, while taking steps to ensure their portfolio is equipped to withstand an ongoing period of uncertainty. Above all else, the need for appropriate portfolio diversification is absolutely crucial."

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