The latest quarterly data reveal that the UK economy is smaller than initial estimates from August 2022 suggested. Output remains below pre-pandemic levels – the only G7 economy where that is still the case.
According to recent quarterly data from the Office for National Statistics (ONS), UK GDP is estimated to have increased by 0.2% in the second quarter of 2022. Published at the end of September, these figures use additional data to provide a more precise picture of UK economic growth, relative to the first quarterly estimate.
Earlier in September, the Bank of England predicted that output would contract by 0.1% over the third quarter of 2022 (July to September). This prediction implied that the UK economy would enter a recession – defined as a contraction of GDP growth in two consecutive quarters. But looking at the new estimates of growth over the summer period, this no longer appears to be the case.
But it’s not all good news. The data also show that UK output is 0.2% below pre-pandemic levels. The GDP data available prior to this release indicated that it was 0.6% above. This means that the UK is now the only G7 country yet to recover to pre-crisis levels in terms of real GDP. It has fallen behind Germany, which has current output equal to prior to the pandemic.
This is due to the quarterly accounts data being accompanied by comprehensive revisions to GDP data in the years 2020, 2021 and 2022, which suggest that there were larger contractions in 2020 than earlier estimates had suggested.
Figure 1: Previous and revised GDP estimates from 2018 to 2022 Q2
Note: 2019 = 100
Relative to the pre-pandemic 2019 average, the newly revised data differ from previous estimates of GDP (see Figure 1). Here the deeper contraction that took place in 2020 can be seen. Notably, the data show stronger growth in 2021 despite GDP settling at its lower current level.
In the first quarter of 2022 (January to March), the economy was estimated to have grown by 0.8%. So, the reported 0.2% output growth in the second quarter reflects the fact that the economy is slowing down compared with the previous quarter.
Which sectors are expanding or shrinking? According to the ONS, the 0.2% growth figure is made up of increases in the output of construction and services, and a fall in the output of production. In particular, services output slowed from 0.8% in the first quarter to 0.2% in the second quarter.
Figure 2: Growth stemming from the services sector in 2022 Q1 and 2022 Q2
Figure 2 shows how different industries have contributed to growth in the services sector over the first and second quarters of 2022. The general fall in services output is the result of lower growth in areas including professional, scientific, and technical activities, transport and storage, and accommodation and food services.
Changes in healthcare also played a part in the revision to quarterly GDP. Figure 2 shows a 3.5% fall in health and social work, slightly up from a 4.3% drop in the previous quarter. This sector was hit hard by the pandemic and even now remains 10% below its pre-pandemic output levels.
Indeed, there were large downward revisions in the new data release from the ONS for the year 2020 for health and social care. This contributed to the sharp contraction estimated to have taken place over this period.
Growth in the accommodation and food services industry has eased between quarters, despite a boost driven by increased activity during the Queen’s Platinum Jubilee celebrations and subsequent bank holidays.
There are warning signs that this sector has been under increasing strain: the ONS data show the industry’s highest ever level of company insolvencies over the quarter. This is largely underpinned by business failures due to the increasing price of energy.
Where does this leave the UK economy?
This data release has come at a precarious time in the UK growth policy debate. Liz Truss started her short-lived premiership by vowing to pursue economic growth at any cost. But weeks later, nearly all of the economic policies set out by her Chancellor Kwasi Kwarteng have been reversed. Nevertheless, growing the economy is likely to remain a priority for Rishi Sunak’s government.
The new data reveal that the UK entered the cost of living crisis before recovering fully from the pandemic, making the policy trade-offs more politically challenging. In any case, the prioritisation of growth needs to be backed up by policy.
But here the government has been found wanting. After unveiling the ‘mini budget’, which included a £45 billion package of debt-funded tax cuts, financial markets were sent into turmoil, as the pound fell to its lowest level against the dollar since 1971. The plan has since been all but scrapped by the new Chancellor, Jeremy Hunt, in an attempt to reassure financial markets.
An increased strain on public finances alongside the updated measures of GDP will place greater importance on the upcoming forecasts from the Office for Budget Responsibility. Earlier this month, the Institute of Fiscal Studies (IFS) released a report stating that the government would need to find £60 billion worth of spending cuts to fund its full growth strategy – a move the IFS has warned would be ‘big and painful’. Reports of a potential black hole in public finances have been accompanied by much open criticism regarding fiscal responsibility, including direct disapproval from the International Monetary Fund (IMF). The latest ONS data release also reveals that real household disposable incomes have fallen by 1.2% in the second quarter of 2022. This squeeze on household budgets, alongside the uncertainty around how mortgage rates will settle in the wake of the government’s policy announcements (and subsequent U-turns), mean that the cost of living crisis still casts a large shadow over the UK economy.
Even if the economy didn’t go into reverse over the summer, monthly estimates from the ONS, which reveal that GDP got smaller in August, suggest that it might be turning now.
Many are waiting to see if the Bank of England will raise interest rates and by how much. And further what this might mean for economic growth, tax revenues and household finances.
Where can I find out more?
- ONS quarterly national accounts data.
- ONS GDP monthly estimate for August.
- IMF criticism of UK tax plans.
Who are experts on this question?
- Jagjit Chadha
- Michael McMahon
- Huw Dixon