UK only G7 member with economic performance still below pre-pandemic level | Financially

Britain’s recovery from the Covid-19 pandemic has been even weaker than first thought and it is the only member of the G7 group of leading industrialized countries where output is still below pre-crisis levels.

The Office for National Statistics said the UK economy shrank by 0.3% in the quarter to September – compared with an initial estimate of a 0.2% drop – and also revised down growth in every quarter since until the third quarter of 2021.

As a result, UK gross domestic product is now estimated to be 0.8% lower in the quarter to September this year than in the final quarter of 2019 – the period immediately before the start of the disruption caused by the Covid.

The ONS previously estimated that the UK was operating 0.4% below its pre-pandemic level and according to the latest figures it is now the only G7 country yet to recover the ground it lost when the global economy was locked in 2020.

Among other G7 members, output is currently 4.3% above end-2019 levels in the US and 2.7% higher in Canada, 1.8% in Italy, 1.1% in France , 0.9% in Japan and 0.3% in Germany.

Gabriella Dickens, UK analyst at Pantheon Macro, said the UK’s underperformance largely reflected weakness in real household spending, which was 3.2% lower in the third quarter of 2022 than in the fourth quarter of 2019, compared to an average increase of 1.6% in other G7 economies.

“Household spending was relatively subdued in Britain due to the comparatively subdued recovery in employment, larger price rises and the fact that households in Britain were less willing to reduce their savings rate than those abroad.”

An analysis of the ONS national accounts release showed a sharp rise in the UK household savings rate in the three months to September, a sign that consumers were taking precautionary measures to strengthen their defenses against an expected recession.

The Bank of England believes the contraction in the economy in the third quarter signals the start of a protracted recession that will last until the whole of 2024. Jeremy Hunt, the chancellor, is planning measures in his budget to boost growth, but he believes the coming recession will be less severe than those of the past.

Darren Morgan, director of economic statistics at the ONS, said: “Our revised figures show that the economy performed slightly less well last year than we previously estimated, with manufacturing and electricity generation particularly weak.

“Household incomes continued to fall in real terms, albeit at a slower pace than in the previous two quarters, while – adjusting for inflation – household spending fell for the first time since the final Covid-19 lockdown in the spring of 2021″.

Martin Beck, chief economic adviser at EY Item Club, said: “The drop in GDP in the third quarter is unlikely to be a one-off. Weak retail trade, a poor set of PMIs (marketing managers’ indicators) and a slowdown in labor action suggest the economy will likely contract again in the fourth quarter.”

Beck said he expected the recession to last into the first half of next year as high inflation weighed on household strength and tighter monetary and fiscal policy weighed on activity.

“Having said that, the economy has not been supportive. Households have room to save a smaller share of income and, by some measures, have yet to dip into the £200bn+ of excess savings built up during the Covid pandemic. Consumer spending is therefore unlikely to fall to the same extent as real incomes. And falling inflation over the next year offers hope for a return to growth later in 2023.”

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