FTSE 100 tumbles as recession fears rise after UK economy shrinks

·4-min read
The FTSE 100 plunged into the red after recording its best session in more than a month as UK economy shrank 0.1% in March. Photo: Dominic Lipinski/PA via Getty Images
The FTSE 100 plunged into the red after recording its best session in more than a month as UK economy shrank 0.1% in March. Photo: Dominic Lipinski/PA via Getty Images

European stocks closed the red on Thursday after Britain's economy went into reverse in March as soaring prices fuelled by Russia's invasion of Ukraine threaten to plunge the country into recession.

The FTSE 100 (^FTSE) traded in the red all day, down 1.3% after the blue-chip index recorded its best session in over a month during the previous session. France’s CAC (^FCHI) tumbled 0.8% and the DAX (^GDAXI) fell 0.5% in Frankfurt.

Sterling (GBPUSD=X) slumped to a two-year low as traders were rattled by the latest GDP figures, falling 0.6% to $1.217 against the dollar.

The latest figures from the Office for National Statistics showed gross domestic product contracted 0.1% in March after growth for February was revised down to zero. It grew 0.8% on a quarterly basis, below expectations.

The services sector was the biggest drag on the economy as consumer-facing services suffered a 1.8% slide in sales during the month, from a 0.5% growth in February as households cut spending. The sector is now 1.5% above its pre-pandemic level.

"The UK economy has now recovered to its pre-pandemic level, but momentum seems to be ebbing away, and recessionary forces are gathering," said Laith Khalaf, head of investment analysis at AJ Bell. "The markets are already looking forward to next year with some trepidation, which explains why we have seen significant falls in the pound and the FTSE 250 since the start of the year."

The domestically-focussed FTSE 250 (^FTMC) closed 0.5% lower.

Concerns over the pace of recovery heightened following stagnation in February, and analysts expect UK inflation to accelerate from its 30-year high.

March’s unexpected economic decline comes ahead of April’s 54% rise in energy bills. British households are now under mounting pressure from soaring living costs on the back of rising energy, food and fuel prices, exacerbated by the war in Ukraine.

Last week, the Bank of England warned consumer prices could reach10%, well above the Bank’s 2% target, later this year after Threadneedle Street hiked UK interest rates to a 13-year high of 1% to stem inflation.

Economists have warned that while growth is still expected this year, the Britain's economy could face "more challenges" in 2023 as recessions risks elevate.

"On top of higher energy prices and taxes, the UK economy now also has to deal with rising interest rates, which will serve to further dampen activity, Khalaf added.

Read more: UK economy shrank in March as GDP fell by 0.1%

Across the pond, US benchmarks were mixed as investors worried about aggressive interest rate rises to tackle inflation that rose to 8.3% last month.

Wall Street’s S&P 500 (^GSPC) advanced 6.24 points, or 0.2%, to 3928.94, the tech-heavy Nasdaq (^IXIC) added 0.6%, and the Dow Jones (^DJI) fell for a sixth day in a row, down 0.5% at London's close.

Analysts say investors in Europe "collected the bearish baton" from their American counterparts as European stocks lost momentum but attempt to recover losses.

"After a tough few days of losses, stocks are managing to bounce, trimming losses," said Chris Beauchamp, chief market analyst at online trading platform IG. "Investors will have been hoping for a bounce, and given oversold ratings across a host of markets, traders will have been expecting one.

"But given the damage done in recent weeks and the still-strong fears about a recession, it seems silly to expect things to return to the orderly gains that prevailed in 2021."

Asian markets also headed lower overnight as geopolitical developments, economic headwinds and China’s coronavirus lockdown dampened the mood. The MSCI’s broadest index of Asia-Pacific (AAXJ) shares excluding Japan lost 0.8%.

The Nikkei (^N225) declined 1.8% in Japan, while the Hang Seng (^HSI) slipped 2.2% in Hong Kong and the Shanghai Composite (000001.SS) drifted 0.1% lower on close.

Watch: How does inflation affect interest rates?