The UK economy is growing slowly, with the latest data from the Office for National Statistics showing a small increase in GDP from March to April 2023. But growth since the pandemic has been sluggish overall and it is expected to remain low for months to come. Structural changes are needed.
The UK economy grew by 0.2% in April, following a decrease of 0.3% in March. Although this sounds like positive news, the latest data – together with a forecast from the National Institute of Economic and Social Research (NIESR) – tell us that the UK economy has flat-lined, exhibiting stable but low growth since the initial post-pandemic recovery.
Using the latest GDP data alongside other information, we can create a forecast of UK GDP growth in the second quarter of 2023. This builds on a previous Economics Observatory article, which explains what GDP is and how to interpret GDP data.
What do the latest GDP data tell us?
The latest data from the Office for National Statistics (ONS) show that monthly GDP grew by 0.2% in April. This was due to increasing activity in the services sector compared with the previous month.
The sector saw overall growth of 0.3% in April, following a fall in output of 0.5% in March. In particular, there was a large relative increase in consumer-facing services, such as food and drinks services, and repairs of cars, vans and motorcycles. This is likely to be a result of increased spending around the long Easter weekend and the three bank holidays in May, as well as an exceptionally low number of new car registrations in March.
The services-led growth in April was partially offset by a decrease in output in the manufacturing and construction industries, which had both seen growth in March. Survey data can help us to pinpoint why. For example, the Purchasing Managers Indices (PMIs) and the Monthly Business Survey for Construction and Allied Trades suggest that the construction sector experienced lower activity in April due to reduced order levels in residential housing projects. This was a result of clients facing increased costs of borrowing due to higher interest rates.
So, monthly GDP growth in April was driven by household spending rather than industrial activity.
Looking at the broader outlook, GDP grew by 0.1% between February and April this year compared with the quarter from November 2022 to January 2023. As Figure 1 shows, the economy has largely flat-lined following the initial stages of post-pandemic recovery. In fact, the April GDP level is only 0.3% above the level in February 2020, just before the pandemic struck the UK.
Figure 1: UK GDP growth index, recent performance and forecast
Sources: ONS, NIESR
Overall, although household spending has enabled services-led growth to keep the UK economy afloat for the past two years, it has struggled to grow past pre-pandemic levels.
How can we use these data to forecast GDP in the second quarter of 2023?
To project forward and forecast what might happen to economy in the coming months, we can use the ONS data alongside higher-frequency information in our GDP Tracker, which is NIESR’s GDP ‘nowcasting’ model.
In a nutshell, nowcasting is forecasting for the near term using recently published data. The data used in the tracker fall into four categories:
- Historical GDP data broken down by sector and sub-sector.
- Industry surveys.
- Data on weather conditions.
- Spending, hiring and housing indicators.
In our model, just as in ONS data, the growth of the UK economy is calculated as a weighted average of the growth paths of the construction, agriculture, production and services sectors, of which the last two are further split into sub-sectors (see Table 1).
For example, within the services sector, business services and finance make up by far the most significant sub-sector, accounting for 42% of the index of services (which itself accounts for 79.6% of the UK economy). The estimates of the shares of the individual sectors in total GDP (that is, their ‘weights’) are published by the ONS and revised every year to account for the continuously changing composition of the economy.
Table 1: The sectoral composition of the UK economy
|Index of services||796|
|(Business services and finance)||338|
|(Government and other services)||220|
|(Distribution, hotels and restaurants)||134|
|(Transport, storage and communications)||103|
|Index of production||135|
|(Electricity, gas, steam and air conditioning)||15|
|(Mining and quarrying)||6|
|(Water supply, sewerage and waste management)||13|
|Index of construction||62|
|Index of agriculture||7|
Historical data are insufficient to create an estimate for a near-term growth path. We also want to understand the expectations that households and firms have about the future, as these will influence their spending and investment decisions.
This is why we look at the surveys or indicators of business sentiment. The GDP tracker uses the OECD’s Business Confidence Index (BCI) for the UK, as well as the Confederation of British Industry’s (CBI) surveys, both of which reveal to what extent firms are optimistic about the near future.
To inform our judgment further, we also consider the PMIs for construction, services and manufacturing, which indicate whether market participants expect a particular sector to grow (when the index is above 50) or contract (when the index is below 50).
Most importantly, surveys are published with a shorter lag than GDP data and are available for the previous month. While the latest GDP data are for April, we have survey data for May, which give us an indication of whether the economy is likely to have grown or contracted in May (the ONS May GDP data won’t be released until July).
As Figure 2 shows, the surveys tend to track the actual data well. Although Figure 2 illustrates this point for the services sector, the same could be said for the manufacturing sector.
Figure 2: ONS service sector growth (three months on previous three months, %), compared with a range of survey data
Source: ONS, CBI, S&P Global/CIPS, NIESR calculations
Note: The shaded swathe shows the highest and lowest values each month of a range of business survey balances (which has been standardised).
To understand the prospects for certain sectors, we use the latest data from the Met Office about weather conditions in a particular month. For example, looking at the number of days of air frost and rainfall can inform forecasts in the construction sector. Similarly, in production (electricity, gas, steam and air conditioning, and mining and quarrying), we look at the lowest temperature recorded in a given month as a proxy for how cold the month was and, consequently, the demand for electricity and coal.
To inform our estimates further, we use weekly data on debit and credit card spending, job vacancy postings, and the issuance of energy performance certificates (EPCs, which are indicators of the energy efficiency of buildings) for new dwellings. Respectively, these data can capture movements in household spending, labour market sentiment, and housing demand.
These are the variables used. The next step is to put these into the tracker model, which has a good understanding of how the different variables can drive the growth or decline of a sector, based on their historical interactions.
Finally, the tracker yields a nowcast of output in the specific sectors, which we then combine to give a total estimate of UK GDP. Using the latest release and the data described above, we arrive at a nowcast of 0.1% growth in the second quarter of 2023.
What does this all mean for the UK economy in 2023?
Our updated forecast of 0.1% growth in the second quarter is consistent with the view that GDP growth will remain close to zero in 2023, as detailed in our latest UK Economic Outlook (NIESR’s quarterly forecast of the entire UK economy).
This flat-lining of the UK economy is due to multiple factors, including high inflation, which squeezes household and firm budgets, and high interest rates, which make borrowing more expensive. Both lead to lower household spending and business activity.
Given that interest rates are going to increase further, household spending and business activity may fall further than expected in the coming months, which means that GDP may be lower than our current forecast. This is what economists call a ‘downside risk’ to the forecast.
But it’s not all gloom and doom. This forecast remains relatively positive: low growth is still growth, and better than a recession.
In the longer term, for UK economic performance to move to a new era of higher economic growth, fundamental change will be needed. In our report, we propose several policy options that can help bring about such structural changes, including the creation of a new National Development Bank to increase public investment to a level of at least 3% of GDP, as well as further decentralisation of levelling-up funding so that this money can be spent in the most efficient way at the regional and local level.
Where can I find out more?
- Our previous piece on the Economics Observatory, which described what GDP is and how to interpret GDP data can be found here.
- The NIESR June GDP tracker is available here.
- The ONS April monthly GDP estimate (the latest data at the time of writing) is available here.
- Find out more about GDP in this Bank of England explainer, ‘What is GDP?’
Who are experts on this question?
- Paula Bejarano Carbo
- Jagjit Chadha
- Huw Dixon
- Michael McMahon
- Joanna Nowinska
- Stephen Millard