UK economy avoids recession in first quarter, but weakness predicted ahead

The economy grew by 0.1% during the period but analysts predict rough ride later in the year

The UK economy has shrunk by 0.5 per cent since the first quarter of 2019. EPA
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The UK economy avoided falling into a recession in the first quarter of 2023, figures from the Office for National Statistics confirmed on Friday.

The economy grew by 0.1 per cent in the first quarter but has shrunk by 0.5 per cent since the first quarter of 2019, before the Covid-19 pandemic.

The ONS numbers also showed that households' real disposable income was 0.8 per cent smaller than in the final quarter of last year, reflecting the rise in prices for energy and food.

Higher inflation meant people were dipping into savings to cover themselves.

The ONS said the savings ratio fell to 8.7 per cent in the first quarter, compared with 9.4 per cent in the last quarter of 2022.

“Households took money out of their savings accounts at a record level while the amount of new mortgage and remortgage borrowing fell,” said Darren Morgan, director of economic statistics at the ONS.

Looming recession

With the 13th rise in interest rates and more predicted to come as the Bank of England battles “sticky” inflation, many analysts now think a technical recession later in the year is a high probability.

“The final Q1 2023 gross domestic product data confirms that the economy steered clear of a recession at the start of 2023,” said Ashley Webb, UK economist at Capital Economics.

“But with around 60 per cent 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.”

The ONS's first-quarter figures only cover the period up to the end of March. Many argue that the real gloom surrounding the economy only really took grip from the beginning of April and culminated in the 0.5 per cent rise in interest rates earlier this month.

“The unfortunate fact is that the game has changed over subsequent months,” said Richard Hunter, head of markets at Interactive Investor.

“As cost-of-living pressures intensify, and with the Bank of England continuing its rate-hiking policy in an effort to tame inflation, there is little room for manoeuvre without tipping the UK towards recessionary territory.”

The fall in disposable income is of particular concern to analysts going forward, as up to 800,000 mortgage holders are set to come off their current fixed rate deals by the end of the year.

“Warning signs are already flashing madly, with household disposable income further eroded by the constant pain of price rises and fewer people with the ability to put a bit away for a rainy day or take advantage of the interest rate hikes which are causing such misery for so many,” said Danni Hewson, head of financial analysis at AJ Bell.

“With hundreds of thousands of mortgage holders about to be clobbered by increased monthly payments there’s little doubt the service sector is in for a rough ride.”

Updated: July 25, 2023, 10:07 AM