UK Economy Averts Immediate Recession With 0.2% Expansion

Leonardo Rasaki

(Bloomberg) — The UK government has been spared the prospect of a summer recession after a surprise increase in second quarter GDP.

The 0.2% growth in the three months to June was a sharp improvement on the previous estimate of a fall of 0.1% 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 ($37.6 billion) from a downwardly revised £43.9 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 to stabilize 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%. 

As a result of the lower starting point, the level of GDP is now estimated to be 0.2% below where it was pre-coronavirus in the final quarter of 2019. In the ONS’s previous estimate, the economy was 0.6% larger than before the pandemic.

The health and financial sectors were particularly affected by the data changes in the second quarter. 

Slump Starting

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%, is expected to reach around 6% 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% 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% from 8.3% 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 of excess savings built up during the pandemic, when lockdowns restricted opportunities to spend.

The current-account deficit, the gap between money coming into the U.K. and money leaving, narrowed to the equivalent of 5.5% of GDP from 7.2% in the first quarter. 

The trade deficit narrowed, and there was big drop in the deficit in investment income from £6.1 billion to £2 billion. This was due to the repatriation of strong overseas earnings in the oil and energy sector.

The figures are unlikely to ease concerns about the willingness of foreign investors to keep funding the deficit by buying British assets. 

In recent years, Britain has had no problems funding its spending habits. Foreigners attracted by a robust legal and financial systems and the prospect of decent investment returns have proved eager buyers of British firms and high-end London properties. They also bought UK equities and debt. 

However, the market rout of recent days suggest they are losing faith in the UK. The current-account deficit this year is forecast by the IMF to be the highest among Group of Seven nations.

 

©2022 Bloomberg L.P.

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