The UK economy contracted by 0.3% in April

By Suzanne Evans, Director, Political Insight

Figures released by the Office for National Statistics (ONS) this morning show the UK economy contracted by 0.3% in April, the sharpest fall since January 2021. Significantly, all sectors of the economy went backwards, however services made the largest contribution to the fall in gross domestic product (GDP), in particular a substantial 5.6% decrease in human health and social work, due, the ONS said, to the winding down of NHS Test and Trace activity. Construction, which has hitherto proved resilient, fell 0.4% in April, while the manufacturing sector suffered a 1% drop because of rising fuel and energy prices, the ONS said. Economists polled by Reuters had on average expected GDP to grow by 0.1% in April from March.
 
Chancellor Rishi Sunak has issued his response to the latest GDP figures, pointing the finger firmly to global economic forces. “Countries around the world are seeing slowing growth, and the UK is not immune from these challenges,” he said. “I want to reassure people, we’re fully focused on growing the economy to address the cost of living in the longer term, while supporting families and businesses with the immediate pressures they’re facing.”
 
Yael Selfin, chief economist at KPMG UK, told Yahoo Finance UK he believes April’s fall in GDP puts the UK on the brink of recession, as does CBI director-general Tony Danker who told journalists: ““Let me be clear – we’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people”. Danker also warned that businesses across the UK are freezing investment decisions, which is hitting the economy. Alice Haine, personal finance analyst at Bestinvest, said: “The latest GDP data from the ONS intensifies the likelihood of the UK heading for a prolonged period of stagflation — where an economy simultaneously experiences stagnant or low economic growth and high inflation”. However, Kitty Ussher, chief economist at the Institute of Directors, was more positive, telling The Telegraph that “April’s economic contraction is entirely due to the scaling back of the government’s Test and Trace activity. If that effect is removed the economy would have grown. In particular, business will take reassurance from the strong performance in retail sales and consumer-facing services in April following a wobble in March. Although headline consumer confidence remains low it seems many people are nevertheless keen to go out and enjoy their post pandemic freedoms.”
 
“The Bank of England looks set to raise interest rates this Thursday for the fifth time since December, its steepest run of rate hikes in 25 years, and is likely to keep going in the coming months as inflation heads for double digits,” according to Pedro Goncalves, Finance Reporter at Yahoo Finance UK.
 
The disappointing GDP figures have led to the pound dropping 0.5% against the dollar to $1.2255 – its lowest level in a month. Recent gains against the euro have been wiped out: the pound has slipped 0.1% to 85.49p. The FTSEmeanwhile is taking a pounding. The FTSE 100 is down 82.55 points, or 1.55% at the time of writing.
 
Business optimism has dropped to its lowest level since March 2021 according to accountancy firm BDO’s optimism index, which fell by 4.82 points to 101.93, the second consecutive month of decline, while the services optimism index fell 5.35 points to 100.95. More than a quarter of mid-sized businesses said they’ve had to put prices up as a result of inflation, according to the poll of 500 company heads, while 19% said they had paused all business investment. Almost a fifth (18%) said soaring inflation and a cost of living crisis is set to have a worse impact than Covid. BDO partner Kaley Crossthwaitesaid: “The fact that business optimism is now at the same level it was more than a year ago while the country was still experiencing coronavirus restrictions paints a worrying picture for the UK economy. Weakened consumer spending power is undoubtedly weighing heavily on businesses and will continue to curtail growth in the months ahead.”
 
More than 950 UK tech companies have raised £12.4bn in venture funding since January, putting the country ahead of China, France and India when it comes to startup investment. Yahoo Finance UK says this means British tech startups have raised more venture capital funding in the first five months of 2022 than in the whole of 2020, when £12bn was secured, according to data by Dealroom analysed for the UK’s Digital Economy Council. The influx of capital means the UK is now home to 122 unicorns — startups valued at over $1bn — with more than 20 cities and towns home to at least one unicorn, and 248 futurecorns — companies that are all set to become unicorns.
 
A survey carried out by the Office for National Statistics (ONS) revealed that 52% of Britons are using less gas and electricity in a bid to cut down costs. The poll, carried out between 25 May and 5 June, also showed an increase in the number of people saying they are spending less on food and essentials - from 36% two weeks ago to 41%.
 
Business Secretary Kwasi Kwarteng has asked the Competition and Markets Authority (CMA) to conduct an urgent review into whether the 5p fuel duty cut is being passed on quickly enough to drivers, and whether there are local variations in petrol and diesel prices. The Petrol Retailers Association(which represents independent fuel retailers) said it "welcomed transparency regarding fuel pricing" and would co-operate with the investigation.
 
Sky News has learnt that Matalan's senior bondholders are lining up Perella Weinberg Partners to advise them on their options with regard to a £350m repayment due to take place early next year. Meanwhile, more junior lenders, who are said to be owed about £80m, are close to appointing Houlihan Lokey to advise them, the broadcaster claims. John Hargreaves, the company's founder, is likely to need to inject tens of millions of pounds of additional funding in order to retain outright control of the company, sources added. Matalan is one of Britain's largest privately-owned retailers, employing about 10,000 people and operating 230 UK stores as well as more than 50 overseas through franchise agreements.
 
Heathrow says passenger numbers were at 79% of pre-coronavirus levels last month. Around 5.3 million people travelled through the airport in May, an eight-fold increase on May last year when the travel restrictions were in place. Terminal 4, which was closed because of lockdowns and travel restrictions reopens tomorrow, to be used initially be used by 30 airlines., PA Media reports.
 
British bus manufacturer Mellor is set to build a new multi-million pound factory in Scarborough after securing planning permission. 100 people will be based at the 54,000 sq ft North Yorkshire production facility when it is fully operational.
 
Morrisons is raising pay for its 80,000 store workers to a minimum wage of £10.20 an hour, making it the highest paying UK supermarket. The minimum wage for all staff working within the M25 is also rising to £11.05 an hour, the same rate as the voluntary London Living Wage. Rival chains Tesco, Sainsbury's and Asda have also announced pay rises for their workers this year.
 
The USA will no longer require air travellers to have proof of a negative Covid-19 test before entering the country from abroad, the BBC reports. Officials said they were dropping the requirement due to the "tremendous progress" the country had made in the fight against the virus. The travel industry has been pushing for an end to the policy, which they say has deterred bookings, as families fear getting stranded abroad. The change comes into effect on Sunday. However, The Centers for Disease Control and Prevention will re-evaluate the policy in 90 days and a government spokesperson said Biden’s administration would "not hesitate to act" to reinstate the rule should new variants make officials believe it is necessary.

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