The UK economy shrank unexpectedly in March as households turned more cautious and strikes hit activity across a wide range of sectors.

Gross domestic product fell 0.3% in March, the Office for National Statistics said Friday. Economists had expected no change. That left growth for the first quarter at 0.1%, the same as recorded in the final three months of last year.

The figures temper optimism that the UK is starting to gain momentum and leave the economy on track for anemic gains. Soaring inflation and rising interest rates have eroded the spending power of consumers and left Britain at the bottom of the Group of Seven nations since the pandemic.

“We’re in a period of virtually no growth,” said David Bharier, head of research at the British Chamber of Commerce. “The core issues affecting British businesses, such as unprecedented inflation, energy price shocks, and record tightness in the labor market, have not gone away.”

Bank of England on Thursday delivered a more upbeat assessment of the outlook, and the first quarter result was stronger than the unchanged reading the central bank expected. The BOE erased its forecast for a recession it had expected as recently as February and said it thinks the economy will be 2.3% bigger by 2026 than it thought.

What Bloomberg Economics Says ...

“This resilience has further to run. The only factor preventing the economy from growing in 2Q will be the extra bank holiday in May to mark the coronation of King Charles III, which will drag on output. We have forecast GDP to remain flat in the current quarter, but think underlying growth will beat that outlook — April’s PMI, for instance, is consistent with a quarterly expansion of 0.5%.”

—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.

Prime Minister Rishi Sunak’s government, facing an election widely expected in the middle of next year, said the figures paint a rosier outlook.

“It’s good news that the economy is growing but to reach the government’s growth priority we need to stay focused on competitive taxes, labor supply and productivity,” Chancellor of the Exchequer Jeremy Hunt said.

All three main sectors of the economy grew in the first quarter. Services was up 0.1% on the quarter driven by increases in information and communication, and administrative and support service activities. Construction was up 0.7% and manufacturing up 0.5%.

The March figures were held back by widespread signs of weakness in the services sector, which shrank 0.5%. Retailers drove that decline with a 1.4% drop. Growth in industrial production, however, was the strongest in the month for almost two years.

The ONS said quarterly growth was also dampened by the continued industrial strife gripping Britain with declines in output across the education, health and transport and storage sectors.

“The fall in March was driven by widespread decreases across the services sector,” said Darren Morgan, ONS director of economic statistics. “Despite the launch of new number plates, cars sales were low by historic standards – continuing the trend seen since the start of the pandemic – with warehousing, distribution and retail also having a poor month.”

A slump in car sales weighed most on consumer-facing services in March even after the release of new number plates, which typically spur sales. Output in wholesale and retail trade of vehicles slipped 4.1%.

Yael Selfin, chief economist at KPMG UK, said the weaker economy in March showed that it remains fragile despite the fall in energy prices, improving supply chain conditions and the recovery in consumer confidence.

“While recession is probably no longer on the cards, vulnerabilities resulting from higher borrowing costs and tighter credit are likely to dampen business and household activity this year,” Selfin said.

The CBI said its surveys show momentum is firming, with growth expectations for the next quarter in positive territory for the first time in a year.

“The UK economy is proving more resilient than widely expected and it looks increasingly likely that the UK will avoid a recession this year,” said Ben Jones, lead economist for the CBI.

Britain’s trade deficit narrowed by a substantial £10.2 billion ($12.8 billion) in the first quarter to £15.1 billion, the ONS said. Falling gas prices helped reduce the cost of fuel imports.

There was also a drop in imports of machinery and transport equipment. Exports fell by less than imports for both goods and services, helping to narrow the deficit. The shortfall is now roughly half its lowest point at the start of 2022.

--With assistance from Elina Ganatra, Andrew Atkinson, Joel Rinneby, Mark Evans and Zoe Schneeweiss.

(Updates with trade figures in final paragraphs.)