Pressure is mounting on the government to deliver an emergency summer mini-budget after recession fears were heightened by a surprise contraction in the economy in March. Evidence that the cost of living crisis was biting even before the arrival last month of dearer energy bills and higher taxes led to a sharp selloff in shares and a drop in the pound’s value to a two-year low against the US dollar. The Labour party, the TUC and the British Chambers of Commerce all pressed for urgent action from the chancellor, Rishi Sunak, following the release of official figures showing a marked drop in consumer spending in March. Boris Johnson pledged that the government would “do things” in the short term to ease the squeeze on living standards without providing any hint about what the measures might be. His pledge came amid growing speculation that the economy would fall into recession – two successive quarters of negative growth – over the coming months. According to the Office for National Statistics, the UK economy contracted by 0.1% in March after flatlining in February. Services, which account for about 80% of gross domestic product, contracted by 0.2%, with retail sales down by 1.4% and spending on cars collapsing by more than 15%. Production, which includes manufacturing, also fell by 0.2%, while construction bounced back by 1.7% after the disruption caused by Storm Eunice in February. The economy grew by 0.8% in the first three months of 2022, but only because activity rebounded strongly in January after the lifting of restrictions imposed in late 2021 to prevent the spread of the Omicron variant of Covid-19. Ed Monk, associate director at Fidelity International, said: “Any momentum the UK economy had as it emerged from the pandemic appears to be ebbing away. Numbers can be revised but it’s clear the UK faces a serious fight to avoid recession this year.” Paul Dales, UK economist at Capital Economics, said: “It now seems likely that GDP will contract in the second quarter. And with the full hit of the cost of living crisis yet to be felt, the chances of a recession have just risen. Even so, with price pressures still strengthening, the Bank of England may have no choice but to add to the woes of households by raising interest rates further.” Rachel Reeves, Labour’s shadow chancellor, said the figures for gross domestic product would increase the public’s worries and urged the chancellor to produce an emergency mini-budget, a call echoed by the British Chambers of Commerce. “Anything less than coming back urgently with an emergency budget to help ease the pressure from the cost of living crisis is a failure by this Conservative government,” Reeves said. Responding to the weaker-than-expected growth figures, Sunak said: “The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times. “Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.” In the City, the FTSE 100 index closed 114 points lower at 7,233 – a drop of more than 1.5% – while the pound at one stage dropped below $1.22 against the US dollar and was trading at levels last seen during the early months of the pandemic. Rain Newton-Smith, CBI chief economist, said: “The economy barely kept its head above the water during a volatile start to the year, but times look set to get that bit tougher. “Cost pressures and rising prices have tightened their grip, with both businesses and households feeling the pinch. The end result is a weaker economic outlook.” Darren Morgan, ONS director of economic statistics, said: “The UK economy grew for the fourth consecutive quarter and is now clearly above pre-pandemic levels, although growth in the latest three months was the lowest for a year.”