The UK government has been spared the prospect of a summer recession after a surprise increase in second quarter gross domestic product (GDP).
At 0.2 per cent, growth in the three months to June was a sharp improvement on the previous estimate of a fall of 0.1 per cent but was caused by revisions to earlier data, the Office for National Statistics said on Friday. Output was still below pre-pandemic levels, making the UK the only Group of Seven not to have fully recovered.
The current account deficit also improved, to £33.8 billion (€38.4 billion) from a downwardly revised £43.9 billion (€49.9 billion), in the first three months of the year, beating forecasts.
The expansion in the second quarter means the economy is not in a technical recession, as many thought.
The slump is now likely to start in the third quarter when output probably contracted because of the extra bank holiday for Queen Elizabeth’s funeral. Economists believe further declines are likely in the following two quarters.
The better immediate outlook will ease pressure on Prime Minister Liz Truss’s embattled government, which has been hit by a run on the pound and a financial crisis since the mini-budget last Friday.
That culminated in a rare intervention by the Bank of England on Wednesday, when it pledged up to £65 billion (€73.9 billion) to stabilise markets over two weeks.
The improvement in growth was due to revisions to earlier figures, with the collapse in 2020 during the pandemic now thought to be 11 per cent.
As a result of the lower starting point, the level of GDP is now estimated to be 0.2 per cent below where it was pre-coronavirus in the final quarter of 2019. In the ONS’s previous estimate, the economy was 0.6 per cent larger than before the pandemic.
The health and financial sectors were particularly affected by the data changes in the second quarter.
Consumers and business struggling with near double-digit inflation are now braced for steep increases in the cost of borrowing as a result of the government announcing the biggest tax cuts since 1972.
The BOE benchmark rate, currently 2.25 per cent, is expected to reach around 6 per cent next year, dealing a blow to the housing market, business investment and consumer spending.
The pressure on consumers was evident in the second quarter as wage growth failed to keep pace with inflation. That squeeze has since intensified, with inflation reaching its highest in four decades.
Adjusted for inflation, household disposable incomes fell 1.2 per cent between April and June, a fourth straight quarter of decline for the first time since 2016. Households sought to maintain their spending by saving less of the income, cutting the saving ratio to 7.6 per cent from 8.3 per cent in the first three months of the year.
How well the economy holds up will depend on the readiness of people to spend more of their income and draw down an estimated £200 billion (€227.4 billion) of excess savings built up during the pandemic, when lockdowns restricted opportunities to spend. — Bloomberg L.P.