Britain’s economy shrinks as inflation ‘begins to bite.’ – The New York Times

In Britain, the cost-of-living crisis is already taking its toll on the economy. Gross domestic product fell 0.1 percent in March after being flat in February, the Office for National Statistics said on Thursday, as spending fell.

The services sector, usually a key driver of economic growth, fell 0.2 percent in March from the previous month, dragged down by a large drop in wholesale and retail businesses, especially for cars. While supply chain disruptions hampered manufacturing, separate data published last month showed more broadly that retail sales fell 1.4 percent in March, because people spent less on groceries and gasoline.

There are signs that households are cutting back as prices rise at their fastest pace in three decades, motor fuel prices hit records and economists forecast that inflation could peak above 10 percent this year.

The cost of living is “really beginning to bite,” Darren Morgan, the director of economic statistics at the agency, told the BBC.

Overall, in the first three months of the year the economy grew 0.8 percent, the statistics office said. The growth was fueled by the better-than-expected recovery in January when restrictions were lifted after the Omicron wave of the coronavirus. Compared with other major economies, it was a strong start to the year: The United States’ shrank 0.4 percent, the French economy was flat and Germany’s grew just 0.2 percent.

But the outlook for Britain’s economy is weak and the risk of recession has intensified. The Bank of England said last week that it expected growth to slow in the second quarter as incomes, adjusted for inflation, continue to fall and as supply chains are disrupted by the war in Ukraine and the lingering pandemic.

Though in an effort to arrest inflation the central bank has raised interest rates four times since December, taking them to their highest level since 2009, policymakers are divided over how many more rate hikes the economy can withstand. The bank has predicted the economy will contract by nearly 1 percent in the last quarter of the year. And for next year, on an annual basis, it also forecasts the economy will shrink.

Much of the pain will come from a squeeze in disposable income, which is expected to be the second-largest drop since records began in 1964, the central bank said. On Wednesday, the National Institute of Economic and Social Research, a research organization in London, added to the bleak warnings. It said it estimated that 1.5 million households across Britain would face food and energy bills larger than their disposable income this financial year.

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Source: https://www.nytimes.com/2022/05/12/business/uk-gdp-economy-inflation.html