UK economy grows by 0.1% in the first quarter but inflation continues to weigh

LONDON — The U.K. economy grew by 0.1% in the first quarter, following an unexpected contraction in March, official figures showed on Friday.

Economists polled by Reuters had forecast the same growth figure for the first three months of the year, but expected stagnation in March, versus the 0.3% fall recorded.

The construction sector expanded by 0.7%, while manufacturing performance went up by 0.5% in the first quarter, with 0.1% growth logged in services and production. On a monthly basis, services dropped by 0.5% in March, particularly because of declines in wholesale and retail trade and motor repairs.

The national statistics agency said there was no growth in real household expenditure, as incomes remained under the squeeze of higher prices.

Ruth Gregory, deputy chief U.K. economist at Capital Economics, said in a note that the quarterly figure “suggests that low real income and high interest rates, as well as the unusually wet weather, are dampening activity,” also citing widespread strike action this year. She assessed that declines in government consumption and net trade made for “gloomy reading.”

“There’s still no recession, but with the full drag from higher interest rates yet to be felt it is too soon to sound the all-clear,” Gregory added.

U.K. growth has been muted so far this year, coming in at 0.4% in January and flat in February, after the economy narrowly avoided a technical recession in 2022.

Inflation remains a more severe blight on the U.K. than on other major economies, with the March reading still above 10%.

The Bank of England on Thursday raised interest rates by 25 basis points to 4.5% making its twelfth consecutive hike in an attempt to combat stubbornly high prices. More optimistically, the central bank said it no longer expects the U.K. to enter a recession this year, despite previously forecasting its longest-ever recession.

The Bank of England now forecasts the U.K. GDP will be flat over the first half of this year, growing 0.9% by the middle of 2024 and 0.7% by mid-2025. 

“It may be the biggest upgrade we’ve ever done,” BoE Governor Andrew Bailey told CNBC on Thursday, defending the revision as the result of a changing picture from conditional data, including financial markets, commodity prices and government policy.

“The level is still quite low though, let’s be honest,” Bailey added.

The euro zone recorded just 0.1% growth in the first quarter of the year, with Germany — the bloc’s biggest economy — stagnating.