ONS figures point to stagflation
Gross domestic product fell by 0.1% in March 2022, according to Office for National statistics data released today, which also revised down February’s estimate of 0.1% to zero growth.
The main contributor was the dominant services sector which fell by 0.2% on the month, reflecting a large decrease (15.1%) in the wholesale and retail trade and repair of motor vehicles and motorcycles industry.
Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform, comments: “The volley of blows dealt to the faltering recovery from the coronavirus pandemic, including surging fuel and energy prices, high consumer inflation, slumping business and consumer confidence and supply chain disruptions, are starting to take their toll on output.
“There is a high risk of an ongoing contraction in the coming months as the squeeze on real incomes ramps up amid the cost-of-living crisis, with inflation heading for double figures, all of which raises the spectre of stagflation (a combination of negative or stagnant economic growth and high inflation).
“The latest data highlights the scale of the challenge ahead for Britain’s economy, as the country also absorbs the hit from the global slowdown and Russia’s invasion of Ukraine. The National Institute of Economic and Social Research (NIESR) said this week it expects Britain’s GDP to fall by 0.2% in the third quarter and another 0.4% in the final three months of 2022.
“NIESR partly blamed the contraction in the second half of the year on the government’s reticence to support consumer spending through tax cuts or extra help for struggling households. Laying bare the scale of the cost-of-living crisis, NIESR said real disposable household incomes are set to drop 2.4% this year causing an extra 250,000 households to fall into destitution (where a family of four has just £140 to live on after housing costs) in 2023 – putting the total in the category of extreme poverty at 1 million.
“The think tank also warned that rising prices and higher taxes are squeezing household budgets right now, with 1.5 million households across the UK facing food and energy bills greater than their disposable income.
1.5 million households across the UK facing food and energy bills greater than their disposable income
“With less money in the pockets of everyday workers, keeping a lid on spending is becoming a daily battle for many households. As consumers tighten their belts – cutting out extras from their budgets such as Netflix subscriptions, overseas travel or meals out – the drop in expenditure will eat further into GDP growth. At the lower end of the income scale, you only need to see the heightened demand for food banks to understand how frighteningly real this cost-of-living crisis is.
“Looking ahead to April’s GDP figure and the outlook is already murky, as this was the month consumer energy prices rose by 54% and taxpayers were hit by an increase in the National Insurance rate and frozen pensions allowances. This is expected to lead to a modest contraction in the second quarter when the real disposable income shock takes hold and inflation edges up even higher – before a bigger hit to GDP growth potentially comes at the end of the year. With the Bank of England expecting inflation to hit double digits by the end of the year, the financial misery already faced by so many will only deepen.
“Now more than ever, it really makes sense to review your income and outgoings and to adopt a budget if you don’t have one in place. Try keeping a spreadsheet of your monthly outgoings to understand where your money is going and what you might be able to cut back on. Other tips include using an app or scanner at the supermarket to stick within a budget or removing any unwanted subscriptions, such as TV streaming or app services.
“Households also need to prepare their finances for a difficult winter ahead, bolstering their financial reserves now in readiness for energy prices jumping further if the Ofgem price cap – the maximum amount that suppliers can charge for each unit of gas and electricity consumers use – rises significantly on October 1. With energy analysts Cornwall Insight expecting another rise of 32%, which could push prices for someone with a typical usage to around £2,600, the winter could be very grim for those who haven’t bullet-proofed their finances.”
For further information, please visit: www.bestinvest.co.uk