Press release

12 May 2023 London, GB

A surprise fall in output in March, but the economy still grew in Q1 – EY ITEM Club comments

The economy continued to face significant challenges in Q1 2023. March's fall in output represented a downside surprise, although it followed earlier strength in consumer-facing sectors, while industrial action continued to weigh on public sector activity.

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James White
James White

Senior Executive, Media Relations, Ernst & Young LLP

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  • The economy continued to face significant challenges in Q1 2023. March's fall in output represented a downside surprise, although it followed earlier strength in consumer-facing sectors, while industrial action continued to weigh on public sector activity.
  • The EY ITEM Club expects the extra bank holiday and ongoing strikes to drag on output in Q2, to the extent that a small quarter-on-quarter fall in GDP is possible. But the recovery should gain greater traction in the second half of 2023 as lower inflation helps to bring about a recovery in household spending power.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “GDP surprised on the downside in March, falling 0.3% month-on-month. However, over Q1 as a whole, the economy still managed to eke out quarter-on-quarter growth of 0.1%. The main cause of March's decline was a 0.8% month-on-month fall in output in consumer-facing parts of the services sector, with retail sales reversing some of the strong gains of previous months. At the same time, public sector output remained below late-2022 levels, reflecting the impact of ongoing industrial action. Similarly, rail strikes caused a substantial fall in activity in the transport sector.

“The first cut of the expenditure breakdown for Q1 offered a reminder that March's poor consumer performance followed a better start to the year, with consumer spending flat after a small rise in Q4 2022. Given the extent to which spending power has been squeezed by high inflation, the resilience of consumers has been impressive. Elsewhere, there was significant volatility in the trade data once again, due to flows of non-monetary gold, while a solid pickup in investment offset a large fall in Government consumption.

“Further industrial action and May's extra bank holiday are likely to weigh on activity in Q2, to the extent that a small quarter-on-quarter fall in GDP is plausible. However, this should represent a temporary setback, and the EY ITEM Club expects the recovery to gain traction in H2 2023 as industrial disputes are resolved, the fiscal loosening announced in the Budget takes effect, and falling inflation helps to bring about a recovery in household spending power.”