Economy shrinks in April – industry reaction

Data from the Office for National Statistics (ONS) shows that the UK economy contracted by 0.1% in April, marking its first monthly fall since August last year.

While the economy contracted on a month-by-month basis, it grew by 0.7% in the three months to April, compared with the previous quarter. The monthly decline was driven by the conflict in the Middle East, with the war pushing up costs for many businesses and households as energy bills rise and consumer demand falls.

The drop was due to a contraction in the services sector, where output fell by 0.2 per cent from the previous month and businesses in the arts, entertainment and recreation industry were hit the hardest. However, in the three months to April, the economy grew by 0.7 per cent, compared with the previous three-month period.

Commenting on the GDP figures for the 3-months to April, ONS Director of Economic Statistics Liz McKeown said “The economy grew in the latest three months as a whole, reflecting strong growth in February and March. This was despite April showing a small fall.

“Services were again the driver with particular strength in computer programming, marketing and wholesale companies across the three months, while construction showed some further signs of recovery after a weak winter.

“This was partly offset by falls in research and development and in sports industries, alongside a notable fall in electricity generation.”

Anna Leach, Chief Economist at the Institute of Directors, said “April’s decline in GDP shows impacts from the Middle East spreading across the economy. Manufacturers, wholesalers and those in transport, accommodation and travel are all reporting lower turnover arising from the conflict.  Meanwhile the prices of crude oil inputs are up 75% on the year. These impacts will only deepen and spread as time passes, with higher inflation eroding consumer incomes and spending. For businesses, sharply rising fuel, transport and input costs, slowing decision-making and declining confidence are combining with a turbulent and costly domestic policy environment, creating strong headwinds to growth. As the UK continues to navigate these challenges, the careful management of policy trade-offs matters more now than ever. The removal of barriers to growth, from tax and regulation and the delivery of a predictable policy environment, must remain the focus of government policy action.”

Neil Rudge, Chief Banking Officer at Shawbrook, said“Today’s figures show that the geopolitical climate is beginning to feed through into the domestic economy, with GDP falling by 0.1% in April following the surprising growth we saw last month.

“Rising oil and gas prices, combined with ongoing supply chain disruption, are creating real headaches for businesses, particularly those with a heavier reliance on international trade. With uncertainty showing no signs of easing, the businesses best placed to weather this will be those that take a hard look at their costs and plan ahead. External funding has a real part to play here, giving SMEs the flexibility to manage pressures and keep pushing forward with their growth plans even in tougher times.”

Policy Chair of the Federation of Small Businesses (FSB), Tina McKenzie, said “April’s GDP contraction should be a warning sign to the Government that the disruption caused by the Middle East conflict, combined with the various cost increases we warned about which began to take effect at the start of the month, could cause significant damage to the UK’s small business and self-employed community.

“Fuel and energy prices have spiked upwards, causing widespread financial pain that is especially acute for small businesses, who do not have the buying power to smooth out price bumps or the ability to hedge prices. The Government should bring in a time-limited 5p cut to fuel duty while higher prices are sustained. The Renewables Obligation, a green levy to encourage the deployment of renewable energy sources, should in large part be taken off small businesses’ energy bills, as has already happened for households.

“As of April, business rates have gone up for thousands of small firms, as have standing charges on energy bills, sick pay, and employment costs. Our big concern is that these higher costs will work together to choke off growth and jeopardise jobs in small businesses.”

Ben Jones, CBI Senior Lead Economist, said “GDP growth of 0.7% in the three months to April confirms a strong start to the year, but today’s figures continue to reflect the unusually robust performance seen in preceding months. With the economic fallout from the Middle East conflict now feeding through to the economy, this pace of growth is unlikely to be sustained.

“Our business surveys report that underlying momentum remains subdued across much of the private sector as global shocks compound domestic headwinds, with businesses facing growing pressure from elevated costs and uncertainty.

“In a world of elevated uncertainty, the UK’s growth prospects will depend increasingly on the strength of its domestic fundamentals. Businesses have shown resilience through recent economic shocks, but many are now facing costs that are becoming increasingly difficult to absorb. That makes it all the more important for government to deliver a business-led growth agenda by cutting energy costs, unlocking infrastructure delivery through robust private sector partnerships, and finding workable landing zones on employment rights reform that support hiring and job creation.”

Suren Thiru, ICAEW Chief Economist, said “This decline is the first economic blow landed by the Iran conflict as falling fuel sales and slowing services output meant the UK’s early-year growth momentum stalled in April.

“Skyrocketing fuel costs have noticeably altered the UK’s growth trajectory having flipped from a tailwind to growth in March to a headwind in April as motorists cut consumption in the face of surging pump prices, after frontloading purchases in March.

“April’s drop likely signals the start of a damaging descent into stagflation with surging energy costs, supply chain disruption and geopolitical instability set to suffocate growth, despite a summer World Cup boost for hospitality and some retailers.

“These disheartening figures mean that UK rate-setters are unlikely to follow their eurozone counterparts in raising rates this month by giving policymakers hope that a slowing economy can limit inflation enough for them to delay tightening policy.”