Image © Adobe Images

The UK economy contracted in March as the services sector recorded a slump amidst wet weather and ongoing public sector strikes and it will only be in the third quarter that economists expect to see a more notable recovery building.

Shrinking services sector activity meant the UK economy contracted by 0.3% in March, however, the ONS confirms the economy grew in the first quarter of the year by 0.1%, confirming the UK is still some way off a recession.

The March contraction was a surprise given the consensus was looking for growth of 0.1% and was driven by a 0.5% decline in the services sector.

"Some of the decline in GDP in March was probably due to temporary factors and may not last," says Ruth Gregory, Deputy Chief UK Economist at Capital Economics.

She says the "unseasonably wet weather in March appears to have weighed on retail activity" (which fell by 1.4% m/m), food and accommodation output (-0.8% m/m) and construction output (+0.2% m/m).

Strikes by civil servants, teachers and train workers are meanwhile likely to have contributed to the 1.7% m/m decline in transport output and the small 0.1% m/m rise in education output.

The economy nevertheless grew 0.1% Q/Q in the first quarter - a performance that equals the final quarter of 2022 - and 0.2% year-on-year.

Growth in the first quarter was underscored by an increase in business investment of 0.7% quarter-on-quarter but the impact of strikes in the public sector has proven notable downside pressures.

One ray of light in March's monthly GDP figures was provided by manufacturing production which unexpectedly grew by 0.7% month-on-month in March, defying expectations for a decline of 0.1%.

The data confirms the economy remains resilient as it has defied predictions made by economists at the back end of 2022 for a slide into recession early in 2023.

But, growth remains sluggish and the surprise -0.3% figure for March serves as a reminder of the difficulties consumers and businesses continue to experience.

"Whilst strike action continued to affect the data, particularly for services, manufacturing and construction are clearly pockets of strength. If confidence surveys are to be believed, there has been a notable uptick in services in April, which may give a boost Q2 numbers," says Jonathan Moyes, Head of Investment Research at Wealth Club.

Economists look for the second quarter to be another sluggish one, but the third quarter is anticipated to see a rebound in economic activity.

"Looking ahead, we think that the MPC's new forecast for GDP to simply hold steady in Q2 is in the right ballpark, given that public sector strikes look set to weigh a little more heavily on GDP in Q2 than in Q1, and output at many businesses will be slightly lower than normal in May due to the lost working day for the King’s coronation," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.