The UK statistics authority said higher prices are "starting to bite" as people spend less and cut back on car journeys due to high fuel costs. The effect of the higher electricity bill in April also remains to be seen. The economy grew 0.8% in the first three months of the year, but shrank 0.1% in March due to a shrinking population.
The main boost to the economy came in January, as the hospitality and tourism sectors recovered from restrictions related to the coronavirus pandemic. However, this happened before the war in Ukraine and before households started to feel the price increases.
Paul Dales, chief economist at Capital Economics in the UK, said the latest data "suggest the economy had less momentum than we thought even before the full blow of the cost of living crisis was felt." He added that the recession risk, defined as the contraction of the economy for two consecutive three-month periods, "just increased".
On Wednesday, the National Institute for Economic and Social Research think tank warned that shrinking household incomes would lead to a recession in the UK in the latter half of 2022.
Last week, the Bank of England forecast that inflation — the rate at which prices are rising — could hit more than 10% by the end of the year. The bank said it had warned the UK was facing a "sharp economic downturn", with prices rising at the fastest pace in 30 years as fuel, food and energy prices rose.
Darren Morgan, director of economic statistics for the ONS, told the BBC people are already spending less as March retail sales are "far below expectations" and people are cutting back on "expensive, non-essential items". "You can see that the cost of living is really starting to bite," he added.
The services sector, which makes up the bulk of the UK economy and includes jobs in hospitality, finance and real estate, was the main driver of the economy's contraction in March, according to the ONS. The worst performer in the sector was the auto industry, which Mr Morgan said "suffered a lot" from falling sales. The auto trade organisation, the Society of Motor Manufacturers and Traders, said March was the "weakest" for new car registrations since 1998 as supply chain problems continue to plague automakers. The UK stock index FTSE 100 fell 2% after the release of weaker than expected growth figures.
Mr Morgan said a ONS survey of 40,000 companies found that more than half of them experienced price increases for bulk materials and goods, but less than half of these companies passed the costs on to themselves. "They absorb these boosts and you have to constantly ask yourself how sustainable this is," he said. Many companies expect commodity prices to rise further, and "their biggest concern is energy prices," Mr Morgan added.
Mike Whalley and Sue Judd, owners of model and toy retailer Everything Dinosaur, said their operating costs have risen "astronomically." "It takes twice as long to get goods as before and costs twice as much to get them here," Miss Judd told the BBC. The couple from Middlewich in Cheshire were forced to pass on some of the higher costs to customers due to higher product prices. Mr Walley said that now, after Brexit, exports to Europe have become more expensive and labour-intensive. "We are being attacked from all sides. This is a difficult situation," he added.
Emergency budget call
Chancellor Rishi Sunak told the BBC he was "ready to do more", but he has not committed to tackling the rising cost of living. The chancellor did not say whether a recession was likely in the coming months, but acknowledged that "the global economy is facing inflationary pressures" as a result of the war in Ukraine. Mr Sunak has threatened to impose a one-time windfall tax on energy companies if they do not invest enough in new projects.
Suren Thiru, head of economics at the British Chamber of Commerce (BCC), said the economic slowdown was "worrying". He called for an emergency budget to give companies "the breathing room they need to increase productivity and strengthen the economy, including rolling back the recently introduced hike in national insurance until at least the next fiscal year."
The CBI business group said businesses and households were "in a quandary." “The economy barely made it through a volatile start to the year, but times look set to get a little tougher,” said CBI chief economist Rain Newton-Smith.
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