UK economy shrinks as latest ONS data adds to concerns – investment experts share their views

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Today’s announcement from the Office for National Statistics (ONS) as they published the  April GDP data makes for difficult reading for those concerned about the health of the UK economy. Whilst many economists weren’t expecting a second month of negative GDP returns, it reinforces the plight of the UK economy as it struggles against so many headwinds.

But what does all this mean for investors? And what about its impact on the financial plans and livelihoods of the clients of financial advisers? Is a recession on the cards now or might a boost over the summer months head it off at the pass?

In this summary, a selection of investment, economic  and finance experts share their views as they digest today’s ONS data: 

 Melanie Baker, senior economist at Royal London Asset Management believes that fundamentals remain challenging as she comments: 

“After today’s data, the UK economy looks at increased risk of a technical recession, defined as two consecutive quarters of GDP growth. I expect at least one quarter of negative GDP growth this year.

“All three main areas of output contracted in April –  manufacturing, construction and services. It looks like some of the fall in output was driven by things unlikely to persist and the decline in NHS Test and Trace activity was a particular drag on growth. Business surveys were consistent with positive activity growth in April and remain consistent with weaker positive activity growth in May. 

“It was also notable that today’s fall in output was not yet driven by consumer-facing services which, overall, rose 2.6% month-on-month in April. However, fundamentals remain challenging in light of high inflation and the cost-of-living squeeze.

“We can already see households saving less and borrowing more which can help shield consumers for a time from the impact of high inflation. We’ve also had a recent package of fiscal measures in the UK that can’t solve the cost-of-living crisis, but should soothe the impact somewhat.”

Paul Craig, portfolio manager at Quilter Investors, believes that things will get worse before they get better as he comments:

“GDP for April shows the UK economy continues to splutter, missing expectations and showing negative growth of 0.3% for the month. While a recession is still a while away, it is looming on the horizon and its effects will begin to be felt in the UK well before we are officially in one. Contraction in services was the main driver of the fall in monthly GDP growth, but manufacturing and production continues to struggle with rising prices and supply chain shortages. With this data reflecting April’s economy, the real picture today is likely to be event starker.

“Despite weakening economic growth, the Bank of England this week is expected to raise rates further as it seeks to get inflation under control and looks to be seen to be doing something. However, as the BoE has pointed out in the past, much of this is inflation is out of its control and as such it is going to be an incredibly difficult task to guide the economy through this volatile and uncertain period. This could ultimately get even more difficult with Brexit tensions rising to the fore once again, while the strong dollar is making any attempt to revive sterling a tough one.

“With sterling sitting where it is just now things are unfortunately going to get worse before they get better. Just as with the pandemic response two years ago, fiscal and monetary policy is going to have to work hand in hand. This could mean we see the BoE reversing course later on this year as the true extent of the economic damage reveals itself.”

George Lagarias, Chief Economist, Mazars clearly has concerns as he comments: “UK GDP was negative, -0.3% for the second straight month in April. The number should come as no surprise, as a dismal retail sales number had already set the tone for the month, falling at a pace comparable only to the first lockdown in 2020. For an economy where consumption is so central, the signs going forward are disconcerting. Technically, we may not yet be in a recession, but for many consumers it certainly feels like one. Faced with a once-in-a-generation cost-of-living crisis, consumers are curtailing unnecessary expenses fast, causing a demand shock to the market. Where we go from here is not a matter of forecasting but of policy decisions by the government and the Bank of England. Policymakers are between the proverbial rock and a hard place. There are no easy solutions. Will they wait for inflation to come down first, risking a broad recession before they react, or will they attempt to alleviate some pressures on consumers, risking a deeper and more persistent inflation?” 

According to Derrick Dunne, CEO of YOU Asset Management, today’s data shows that the UK economy is not in a good place and is “deeply concerning” as he comments: 

 “UK GDP fell by 0.3% in April, the second consecutive monthly drop and further fuelling fears of a recession. At an industry level, all of the key sectors – services, production and construction – experienced contractions, with the ONS noting that we have not seen this happen since January 2021.

“It’s clear that the UK economy is not in a good place. Soaring inflation and living costs, coupled with supply chain disruption and hordes of firms unable to find staff, all threaten future growth. Just last week in fact, the Organisation for Economic Co-operation and Development (OECD) forecasted that UK GDP would be broadly flat throughout 2023, making it the slowest growing economy in the G20 aside from Russia.

“This is deeply concerning, and puts the Government under even more pressure to take steps to reinvigorate the economy – for example through tax cuts and other incentives which will encourage consumers to start spending again. Against this uncertain backdrop investors must prepare for yet more volatility, and resist temptation to make any sudden movements which could impact their long-term plans.”

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