UK Private Sector Contracts for 8th Consecutive Quarter, New Research Shows

The Bank of England can be seen as people cycle through the City of London financial district, in London, Britain, on June 11, 2021. (Henry Nicholls/Reuters)

The UK’s private sector shrank for the 8th quarter in a row at the start of 2023 but is expected to return to growth in the next quarter, according to new research.

The Confederation for British Industry (CBI) said in its latest growth report that activity across the UK private sector contracted by around 4 percent over the three months to March. It is the 8th consecutive quarter of decline but the mildest drop since July 2022.

The drop was largely driven by weakness in the service sector, amid an 11 percent drop in consumer services volumes and a 5 percent reduction in business and professional services, according to the CBI survey.

Meanwhile, distribution activity nudged slightly higher and manufacturing output contracted but at a notably slower pace over the quarter.

People shopping on Oxford Street in London, on Dec. 27, 2022. (James Manning/PA Media)

The CBI said it is expected to witness growth of 5 percent in the next quarter, with manufacturing firms particularly optimistic about a recovery in output over the next three months.

Manufacturing firms expect to see a 12 percent rise in output in the three months ahead, while a 4 percent rise is expected in service volumes over the same period.

Alpesh Paleja, lead economist at the CBI, said: “It’s encouraging that the private sector is expected to return to growth in the months ahead, chiming with a range of other data indicating some resilience in economic activity.

“But let’s be clear—at best—this illustrates an economy skirting stagnation-like conditions rather than delivering the strong, sustainable growth we need.”

He warned that the UK still faces “considerable economic headwinds.”

“Inflation remains stubbornly high and, while businesses and consumers can expect lower energy prices to feed through later in the year, the pressures on household budgets will weigh on consumer spending.”

Stubborn Inflation

Last week, the Bank of England, the UK’s central bank, raised interest rates for the 11th time in a row, following a surprise rise in inflation in February, with the Consumer Prices Index (CPI) increasing to 10.4 percent from 10.1 percent in January, driven by surging food and drink prices.

The bank’s Monetary Policy Committee (MPC) voted by a majority of 7–2 to increase the bank rate by 0.25 percentage points to 4.25 percent.

Governor of the Bank of England Andrew Bailey giving evidence to the Treasury Select Committee at the House of Commons, London, on March 28, 2023. (House of Commons/UK Parliament via PA Media)

Central bank boss Andrew Bailey told the BBC that the bank will have to put up interest rates even further if companies raise prices in a bid to beat inflation.

Some business groups have expressed reservations about the central bank’s decision to raise interest rates.

David Bharier, head of research at the British Chambers of Commerce, said, “Interest rate rise alone is a blunt instrument that doesn’t address some of the fundamental causes of inflation such as failure in the energy market and global supply chain shocks.”

He said that small and medium-sized businesses, like consumers, are “getting hit from both rising prices and rising borrowing costs.”

‘Technical Recession’ Avoided

Earlier this month, the Office for Budget Responsibility (OBR), the UK government’s official economic forecaster, said the UK economy is expected to shrink less than previously expected.

It said in its latest assessment that the UK will avoid a “technical recession,” which means two consecutive quarters of negative growth.

But it still forecast a contraction of 0.2 percent this year, though it is a significant improvement on the 1.4 percent shrinkage predicted in November.

The OBR also upgraded its growth forecast for 2024 from 1.3 percent to 1.8 percent, but downgraded predictions for the following years to 2.5 percent in 2025, 2.1 percent in 2026, and 1.9 percent in 2027.

It forecast that inflation in the UK will fall from 10.7 percent in the final quarter of last year to 2.9 percent by the end of 2023, partly owing to the impact of the cost-cutting measures.

Living Standards Falling

The OBR also said that living standards are expected to fall by the largest amount since records began, though the decline is not as bad as had been forecast in November.

The forecaster said real household disposable income per person is expected to fall by a cumulative 5.7 percent over the two financial years 2022–23 and 2023–24.

“While this is 1.4 percentage points less than forecast in November, it would still be the largest two-year fall since records began in 1956–57,” the forecaster said.

The OBR said that the UK’s tax burden is expected to reach a post-war high of 37.7 percent of GDP in 2027–28, the highest since the Second World War.

The headline measure of public sector net debt in the UK, which includes the Bank of England, is forecast to reach the equivalent of 103.1 percent of GDP in the financial year ending March 2024.

This would be the highest level since the end of the financial year 1960–61 when debt stood at 107.5 percent.

PA Media contributed to this report.