News & Analysis

Data out of the UK this morning highlighted the stresses that rising inflation, on both the producer and consumer sides, is having on economic activity. In March, the economy contracted 0.1% MoM, driven by a broad-based slowdown in activity.

The index of services, manufacturing, and industrial production all contracted by 0.2% MoM, offset by an expansion in just the construction component (+1.7% MoM). While the slip in March’s GDP weighed on the Q1 growth figure, which printed 0.2 percentage points under expectations at 0.8%, the more pressing concern is the notable slowdown in economic momentum heading into the second quarter, where the rise in the Ofgem price cap in April will result in inflation pressures having a more acute impact on consumer demand. The slowing momentum isn’t just visible in March’s negative GDP print, but also in the downgrade in February’s monthly GDP number from 0.1% MoM to flat. On the back of today’s weaker-than-expected growth data, we now look for a negative Q2 QoQ growth print.

The contraction in the index of services (-0.2%) was the main contributor to March’s fall in GDP. Within the services index, a contraction in wholesale and retail trade (-2.8%) was the main contributor. Specifically, this was due to the fall in the repair of motor vehicles and motorcycles (-15.1%) within the wholesale and retail trade component. This contributed -0.28% to the index of services MoM reading, nearly completely offsetting the aggregate positive contribution (+0.29%) that was driven by higher human health and social work activities (+0.13%). It wasn’t just motor vehicles and motorcycles that had a large impact on the services index, however, as administrative and support service activities and information and communication also contributed -0.11% on net. Meanwhile, accommodation and food service activities, the most exposed sub-component of growth to the cost of living crisis, printed flat on the month – we don’t expect this to continue.

Further warning signs came from the Society of Motor Manufacturers and Traders, who stated that March 2022 marked the weakest March for new car registrations since 1998. Given new car registrations are a good forward indicator for consumer sentiment and thus growth conditions, this is just another concerning index for growth conditions heading into the second quarter. Albeit, the warning sign has been somewhat tainted by supply chain issues of late.

On the whole, today’s GDP reading has done little to turn around sentiment over UK assets, which continue to factor in increased recession risks. The pound, arguably the best bellwether of the UK’s relative macroeconomic performance, continues to trade near pandemic era lows against the dollar, while it is also losing ground against the stagflation impacted euro.

The beleaguered pound is finding no support from domestic growth conditions as it sheds almost 7% since mid-April




Simon Harvey, Head of FX Analysis


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