GDP posts a surprise contraction in March

• UK GDP rose by 0.8% in Q1 2022, just below own our and the Bank of England’s forecasts for growth of 0.9% and consensus expectations of a 1% rise.
• The monthly measure posted a 0.1% fall in March compared to consensus expectations for growth at 0%.
• Services output fell 0.2% below consensus expectations of a 0.1% rise and was the main contributor to March’s fall. Weakness in the automotive industry, falls in output in consumer facing services and the unwind of COVID related services weighing on growth
• Industrial production also fell by 0.2% - with manufacturing’s 0.2% fall the bulk of that adjustment. Construction grew by a robust 1.7%.
• We expect growth to remain subdued in the coming months as consumers grapple with rising energy prices and tax increases, which policy is doing little to offset. 

UK GDP rose by 0.8% in Q1 2022, just below own our and the Bank of England’s forecasts for growth of 0.9% and consensus expectations of a 1% rise. On a monthly basis, GDP unexpectedly contracted by 0.1% March compared to consensus expectations for growth at 0%. Growth for February was revised down to 0% (previously 0.1%). 

Services output fell 0.2% below consensus expectations of a 0.1% rise and was the main contributor to March’s fall. Industrial production also fell by 0.2% - with manufacturing’s 0.2% fall the bulk of that adjustment. This was partially offset by construction, which grew by a strong 1.7%. Within services output, wholesale and retail trade output was the main negative contributor falling by 2.8% driven by continued weakness in the automotive industry and output in consumer facing services fell by 1.8%. Health and social work activities was the largest positive contributor to services, but within this sub-sector the unwind of Covid-related activities weighed heavily. The NHS Test and Trace and COVID-19 vaccination programme reduced GDP growth by 0.2ppts in March 2022, it is likely that the unwind of these activities will continue to weigh on growth into April. 

The first quarterly estimate for GDP using the expenditure shows Consumption is estimated to have risen by 0.6%, driven by increases in spending on hotels and restaurants and clothing and footwear but partially offset by lower net tourism and transport spending. Government expenditure fell by 1.7% mostly due to the unwind of Covid related services and Gross Fixed Capital Formation rose by 5.7%. Exports fell by 4.9% and imports rose by 9.3% with the net trade deficit widening to 5.3%, however these figures may be subject to revision due to changes in the assessment of trade data. Business investment fell by 0.5% this quarter and remains 9.1% lower than pre-pandemic levels. 

Growth is likely to remain subdued in the coming months as consumers grapple with rising energy prices and tax increases, which policy is doing little to offset. Savings will play some part in supporting consumption, but there is large uncertainty about where these reserves lie and how they will be used by households.