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UK ‘perilously close to a recession’ as weak GDP recorded

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  • 13/06/2022
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UK ‘perilously close to a recession’ as weak GDP recorded
The UK’s Gross Domestic Product (GDP) is estimated to have fallen by a weaker-than-expected 0.3 per cent in April, following a decline in the previous month.

Gross domestic product (GDP) measures the value of goods and services produced in the UK. It estimates the size of, and growth in, the economy.

The latest figures for April reveal GDP fell by 0.3 per cent, following a 0.1 per cent decline in March 2022.

According to the Office for National Statistics (ONS), services were the main downward contributor to the figure, falling 0.3 per cent, owing to the big reduction in the Covid NHS Test and Trace activity.

Production also fell 0.6 per cent in the month, pulled south by a one per cent fall in manufacturing amid supply chain shortages and price rises.

Meanwhile, construction also fell by 0.4 per cent after strong growth in March off the back of “significant repair and maintenance activity following the storms in February”, the ONS noted.

However, it added that this is the first time that all the main sectors (services, production and construction) have contributed negatively to a monthly GDP estimate since January 2021.

But, GDP remains 0.9 per cent above its pre-coronavirus level (February 2020), and on a quarterly basis (February to April 2022), it increased by 0.2 per cent.

UK ‘perilously close to a recession’

For Paul Dales, chief UK economist at Capital Economics, the 0.3 per cent month-on-month GDP fall “wasn’t as weak as it looked”, but does “increase the chance that the economy is slipping into recession”.

He explained that without the NHS Test and Trace programme, GDP would have actually increased by 0.1 per cent. Further, while services output fell 0.3 per cent, output in consumer-facing services “which is where we would expect households to rein in their spending first, rose by a solid 2.3 per cent month-on-month”, he said.

Dales added: “It is too early for the full drags from higher inflation and interest rates to have been felt. So, GDP will stay weak over the coming quarters and a recession is a real risk.

“Our forecasts that GDP will be flat in May and decline by 0.3 per cent month-on-month in June are consistent with GDP contracting by 0.5 per cent quarter-by-quarter in Q2. And a return to modest growth in the following three months would only result in a 0.1 per cent quarterly rise in Q3.

“In other words, the UK is perilously close to a recession (defined as two consecutive quarters of falling GDP).”

The economist added that with inflation at a 40-year high of nine per cent in April and still climbing, the Bank of England may be inclined to raise rates by 25bps to 1.25 per cent instead of the 50bps rise Capital Economics is forecasting.

Since its inception in 1997, the Monetary Policy Committee (MPC) has never raised rates during a recession.

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