Thu. Jul 7th, 2022

The UK economy grew faster than previously estimated in the final quarter of last year, but surging inflation resulted in a fall in households’ real income, shrinking savings and lower growth in spending even before the war in Ukraine led to soaring energy prices.

UK gross domestic output grew 1.3 per cent between the third and fourth quarters of last year, stronger than the initial reading of 1 per cent according to the Office for National Statistics.

Compared with the fourth quarter of 2019, before the pandemic, output was down only 0.1 per cent, revised from the previous estimate of a 0.4 per cent fall, meaning that the economy had largely recovered from the hit of the pandemic.

The UK recovery is lagging those of the US and the eurozone, which passed pre-pandemic levels in the final quarter of 2021, although the German economy was still 1.1 per cent below this level.

Line chart of GDP index rebased, Q4 2019 = 100 showing UK economic growth has been revised up

Output growth in health and social work activities was revised up to 4.3 per cent following the surge of Covid-19 infections and the extension of the vaccination program. That pushed government expenditure to about 9 per cent above pre-pandemic levels, highlighting how a large part of the economic rebound is down to the government’s efforts to deal with the pandemic.

In contrast, household expenditure rose less than previously estimated and was 1 per cent below pre-pandemic levels. This comes as real household disposable income fell by 0.1 per cent, reflecting surging inflation.

Real income, adjusted for inflation, fell even before the jump in consumer prices expected in April and the autumn as the regulator increases its energy price cap to reflect escalating gas and oil prices following Russia’s invasion of Ukraine.

This means that households bought more goods and services by reducing their savings. The household saving ratio, the average percentage of disposable income that is saved, decreased to 6.8 per cent in the last quarter of 2021, down from 7.5 per cent in the previous three months and the lowest since the start of the pandemic, ONS data showed .

Barret Kupelian, senior economist at advisory firm PwC, said: “The revisions imply that UK households are entering a period where they will face a very substantial hit to their living standards with a smaller savings buffer than initially anticipated.

“In the absence of further government support, this could mean that household consumption is cut back further and faster than initially estimated,” he added.

“The quarterly pace of growth will slow as the squeeze on real incomes continues to bite,” said Paul Dales, economist at Capital Economics consultancy. He added that with high inflation more of a problem than weak GDP growth, the Bank of England was likely to raise interest rates from 0.75 per cent now to 2 per cent next year.

Line chart of Real exports of goods and services, Q4 2019 = 100 showing UK exports lag those of other countries

Despite an upward revision, business investment was 8.6 per cent below pre-pandemic levels. The extremely low level is “due to Brexit uncertainty”, according to Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics.

Exports were also a hefty 15.7 per cent below their level in the final quarter of 2019. Tombs said that UK “exports have consistently underperformed relative to other advanced economies since Q1 2021, suggesting that Brexit is largely to blame”.

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