LONDON- Britain’s economy made a lacklustre start to 2023 as inflation ate into households’ disposable income, official figures showed on Friday, and economists see a risk of recession ahead as higher interest rates keep up the pain even as inflation eases.
The economy grew by just 0.1 percent in the first three months of the year, unchanged from an initial estimate by the Office for National Statistics’ (ONS), and leaving output 0.5 percent lower than it was in the final quarter of 2019, before the COVID-19 pandemic.
Households dug into their savings – although the overall saving ratio remained higher than before the pandemic – and the cost of living increased faster than incomes.
The squeeze on households looks set to continue, as the Bank of England raised interest rates to a 15-year high of 5 percent in June and investors see little sign that it is about to end its tightening cycle.
“The final Q1 2023 GDP data confirms that the economy steered clear of a recession at the start of 2023. But with around 60 percent of the drag from higher interest rates yet to be felt, we still think the economy will tip into one in the second half of this year,” said Ashley Webb, an economist at consultancy Capital Economics.
While the BoE forecast last month that inflation would drop to just over 5 percent by the end of the year, BoE Governor Andrew Bailey said last week that inflation was proving stickier than expected after it held at 8.7 percent in May.
Britain’s economic recovery since the pandemic has been much slower than almost every other big advanced economy, though Germany has struggled too and its economy in the first quarter was also 0.5 percent smaller than before the pandemic.
In annual terms, Britain’s economy had grown just 0.2 percent by the end of the first quarter.
Some economists said the weak GDP data stood at odds with more robust trends for jobs, wages and consumer confidence, and further sluggish growth was more likely than outright recession.
“We expect unemployment to inch up, but only slowly and to a limited degree,” HSBC economist Liz Martins said.
British households have been put under pressure by a surge in inflation, which hit a 41-year high of 11.1 percent last year after Russia’s invasion of Ukraine sent natural gas prices soaring, and has been slow to fall since.
Friday’s figures showed households’ real disposable income – money available after adjusting for inflation, taxes and benefits – was 0.8 percent lower than the previous quarter. This was the biggest drop since the second quarter of 2022, and 0.5 percent lower than a year earlier, reflecting higher costs for electricity, gas and food. – Reuters
