UK remains only G7 economy to languish below pre-pandemic levels

Vital revisions to UK information point out that Britain is the one G7 financial system that is still smaller than it was earlier than the pandemic, regardless of an improved efficiency within the second quarter that diminished fears of recession.

Workplace for Nationwide Statistics figures launched on Friday confirmed that UK gross home product for the three months to June this 12 months remained 0.2 per cent under the extent it reached within the closing quarter of 2019.

Beforehand, official information had indicated that GDP had risen 0.6 per cent above pre-pandemic ranges by June.

Against this with the UK’s failure to return to pre-pandemic ranges, the eurozone financial system reached 1.8 per cent above 2019 ranges within the second quarter. The US had recovered to pre-pandemic ranges by the beginning of final 12 months.

Friday’s UK progress downgrade was largely as a result of a decrease ONS estimate of 2020 output. Nonetheless, progress for 2021 and this 12 months was revised greater.

The ONS now says the financial system grew 0.2 per cent between the primary and the second quarters of 2022.

This compares with its earlier estimate of a 0.1 per cent contraction for the interval — an enchancment that can allay fears that the UK financial system is already sliding into recession. The change was pushed by a greater than anticipated efficiency {of professional} and monetary providers.

The information counsel the UK financial system entered the price of dwelling disaster earlier than it had managed to completely get well from the pandemic, laying naked the problem going through Britain’s new prime minister, Liz Truss.

In a reference to the tax reduce and borrowing plans of Kwasi Kwarteng, Paul Dales, chief UK economist at Capital Economics, mentioned the information “makes the chancellor’s fiscal plans look much more untenable”.

Kwarteng’s announcement final week of £45bn of debt-funded tax cuts triggered turmoil within the sterling and gilts markets, pushing the Financial institution of England to take emergency motion to keep away from a meltdown within the UK pensions sector. With the federal government’s deliberate tax cuts forecast to maintain inflation greater for longer, markets at the moment are pricing in considerably greater rates of interest by mid-next 12 months.

“The general image is that the financial system is in worse form than we beforehand thought even earlier than the total drag from the surge in inflation and leap in borrowing prices have been felt,” Dales mentioned.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, mentioned the figures will compel the Workplace for Finances Duty, the UK fiscal watchdog, to revise down additional its estimates for future potential GDP. They might additionally imply that the tax-to-GDP ratio will probably be barely greater than beforehand estimated.

“The harm inflicted to the financial system’s provide aspect by Covid and Brexit is even bigger than beforehand thought,” Tombs mentioned.

Some particulars within the information launch additionally revealed that households have been damage by excessive inflation. Actual family disposable revenue fell 1.2 per cent within the second quarter, the biggest of the 4 successive drops as fast-rising costs diminished the worth of wages.

The family saving ratio fell to 7.6 per cent, from 8.3 per cent within the earlier quarter and from 26.8 per cent at its peak within the second quarter of 2020, when the nation was in a stringent lockdown. That is nonetheless above pre-pandemic ranges, suggesting households have scope to soak up some future revenue shocks.

Grant Fitzner, ONS chief economist, mentioned: “These new figures embrace extra correct estimates of the monetary sector and the way the prices going through the well being sector modified all through the pandemic.”