UK growth stutters in February as cost-of-living squeeze looms

Britain’s economy slowed more sharply than expected in February, reflecting a hit to car production from component shortages, storm disruption and reduced health spending as households braced for a tighter cost-of-living squeeze.

Monthly gross domestic product growth was just 0.1 per cent in February compared with 0.8 per cent in January, the Office for National Statistics said on Monday, below the 0.3 per cent forecast by economists in a Reuters poll.

“The news that the economy was hardly growing at all in February … increases the risk of a contraction in GDP in the coming months as the squeeze on household real incomes intensifies,” Ruth Gregory, senior UK economist at Capital Economics, said.

Britain’s economy in February was 1.5 per cent larger than it was two years earlier, just before the country was hit by the COVID-19 pandemic, the ONS said.

GDP collapsed by more than 9 per cent in 2020, its biggest annual fall since just after World War One, but rebounded sharply in 2021 and suffered only a modest hit from the Omicron variant of coronavirus in December.

However, economists have downgraded their growth forecasts for 2022 due to a surge in inflation caused by rising energy and commodity prices — partly linked to the war in Ukraine — as well as ongoing supply-chain difficulties since the pandemic.

Last month the government’s Office for Budget Responsibility cut its forecast for growth in 2022 to 3.8 per cent from 6.0 per cent in its previous forecast in October, predicting that inflation would hit a 40-year high of 8.7 per cent later this year.

The squeeze on households’ disposable income from higher inflation and a payroll tax rise that took effect in April will be the biggest since records began in 1956/57, the OBR said.

Finance minister Rishi Sunak — whose popularity has slumped after offering only limited support to help households in a fiscal statement last month — said he welcomed the continued growth.

However, some analysts think the economy will shrink over the three months to June, reflecting reduced COVID-related health spending and an extra public holiday to mark Queen Elizabeth’s Golden Jubilee, as well as reduced household disposable income.

“Given this weak near-term outlook for GDP growth, we continue to think that the (Bank of England) will stop increasing Bank Rate after raising it to 1.0 per cent next month,” Pantheon Macroeconomics’s Samuel Tombs said.

Britain’s dominant services sector drove monthly growth in February as the Omicron wave of coronavirus cases ebbed.

Services output, up 0.2 per cent, was boosted by a surge in travel bookings as COVID-19 restrictions eased, although this was largely offset by a sharp fall in health spending after COVID-19 testing and vaccination halved from January’s high level.

Factory output dropped by 0.4 per cent reflecting continued falls in car production due to component shortages and declines in other areas, while milder-than-usual winter weather depressed demand for electricity, causing power generation to fall by 1.0 per cent.

Storms and rising materials costs hurt construction, where output fell by 0.1 per cent on the month.