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  • Writer's pictureCrest Economics

UK Economy shrinks as Ukraine war takes toll – May 2022

The UK economy unexpectedly falls in March, as consumers cut back on spending as the cost-of-living rises. GDP fell 0.1% after stagnating in February, with the economy expanding a total of 0.8% of the first quarter – less than the 1% forecasted. Whilst growth returns to above pre-pandemic level, with the economy entering the highest level of inflation since the 1980s, the UK economy risks losing momentum and sliding into a recession.

The Government is facing pressure to offer more support for households from further warnings that another quarter of a million people will enter poverty due increases in energy tariffs, higher cost of food and other commodities arising from the conflict in Ukraine. In March, consumer-facing services dropped 1.8%, driven by a sharp 2.8% fall in wholesale and retail trade. The services sector and manufacturing both saw output shrink 0.2%. Business investment fell by 0.5% and remains 9.1% below its pre-coronavirus pandemic levels.

Against the imminent risk of stagflation, the Bank of England’s decision to raise interest rates continues to look like a misstep. Furthermore, trade data showed exports fell 3% in real terms and remain 14.6% below average 2018 levels – the last year before major upheavals resulting from Brexit. Bloomberg Economics expects the economy to continue to contract in the second quarter, barely expanding at all across 2023 and 2024.

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