UK economic growth in Q3 slower than first thought

The UK’s economic recovery slowed down by more than previously estimated between July and September, according to revised figures.

The data from the Office for National Statistics (ONS) pre-dates the emergence of the Omicron variant of Covid-19, which is expected to result in a further setback.

Gross domestic product (GDP) is now believed to have risen by 1.1% in the third quarter, down from an earlier estimate of 1.3%.

However, the data revisions also show that the economy is closer to pre-pandemic levels than first estimated.

Last year’s economic slump has now been estimated at 9.4% — still the biggest decline in 99 years but smaller than the previously estimated 9.7%.

This means that by the end of September the economy was 1.5% smaller than at the end of 2019, rather than 2.1%.

Elsewhere, the report showed that with the economy opening back up in the third quarter, households increased spending on restaurants & hotels, transport and recreation & culture. Despite this increase, household saving was still up on pre-pandemic levels.

The third quarter figures also show a decrease of 8.8% in goods exports and a 2.5% contraction in business investment.

UK economy set to reach pre-Covid levels in early 2022, says OECD

The UK economy is recovering and is expected to reach pre-crisis levels at the beginning of 2022, according to the OECD.

A new report says that output rose strongly in the first half of the year as restrictions were eased and the economy gradually reopened, although growth has since slowed due to supply and labour shortages.

The report predicts that output will rise by 6.9% in 2021, before moderating to 4.7% in 2022 and 2.1% in 2023.

Consumption is expected to be the main driver of growth but is likely to slow as government support is wound down and prices continue to rise.

Meanwhile, business investment will improve but continues to be held back by uncertainty, the OECD said.

Increased border costs after Brexit are weighing on imports and exports, and inflation is expected to keep rising due to higher energy and commodity prices and continuing supply shortages.

Inflation is expected to peak at 4.9% in the first half of 2022 and then fall back towards the 2% target by the end of 2023.

“Monetary policy should tighten gradually to bring inflation back to target over the medium term, as price pressures show signs of becoming persistent,” the OECD said.

“Fiscal policy should continue to support the economy and become more targeted to aid economic restructuring.

“Boosting training and career counselling programmes can facilitate economic reallocation and ease job transitions. Government programmes should focus on providing certainty on long-term issues such as the transition to net zero in order to support investment.”

The report adds that it will be important to monitor the effects from phasing out fiscal support measures on businesses and households, in order to avoid the risk of tax increases “derailing the recovery”.

UK economy set for fastest growth in 80 years

The UK economy is predicted to grow strongly over the next few months and return to its pre-pandemic peak by the end of the year, according to a new report.

Thanks to the success of the vaccine rollout and the relaxation of Covid-19 restrictions, the EY ITEM Club now expects GDP to grow by 7.6% in 2021 – the fastest growth since 1941 – followed by 6.5% growth in 2022.

Now that people are returning to working, shopping and socialising, consumer spending is anticipated to rebound strongly. And if households spend some of the £200bn of excess savings built up since early 2020 it would make that rebound even stronger, the EY ITEM Club said.

Support from macroeconomic policy will also underpin a strong expansion this year and next, according to the report. Fiscal policy remains in loosening mode, while the Chancellor may be able to rein back planned future tax rises and spending cuts if the economy recovers more strongly than the Office for Budget Responsibility (OBR) expects. Meanwhile, the Bank of England is predicted to keep the official interest rate at its current record low of 0.1% until late 2022.

Rising inflation and unemployment could affect growth, however.

Consumer price inflation is anticipated to reach a peak of 3.5% in the fourth quarter of 2021, while unemployment is seen rising in the second half of the year, peaking at 5.1% before falling back to 4.6% in 2022.

Tourism and hospitality boost UK economy in May

Businesses that were among the worst hit by lockdown helped the UK’s economic recovery to accelerate last month, according to the latest Lloyds Bank UK Recovery Tracker.

The report showed that 11 out of 14 sectors reported faster growth in output month-on-month in May, up from nine in April, as the UK moved further out of lockdown.

The strongest growth was seen in the tourism and recreation sector, with pubs, hotels, restaurants and travel agents benefiting from a release of pent-up consumer demand.

Transport — including bus and rail operators, and providers of logistics services — also bounced back during May.

Lloyds also revealed that all 14 sectors monitored by the monthly tracker reported job creation during May, up from 12 sectors in April and the highest number since April 2015.

Employment increased in tourism and recreation for the first time since January 2020 as businesses benefited from the relaxation of lockdown restrictions.

The strongest rate of job creation was seen in manufacturing as firms increased their workforces to meet rising international demand for goods.

“When we look at the pace of growth, sectors that have been acutely affected by Covid-19 restrictions are now outpacing sectors that have been able to operate more freely during lockdown,” commented Jeavon Lolay, head of Economics and Market Insight at Lloyds Bank Commercial Banking.

“Whether the four-week delay to further easing of restrictions will impact this trend is unclear. But while the delay is understandably disappointing for many businesses, there’s no denying that the economy is now on a much sounder footing.”

UK economy picked up in March

The UK economy contracted by 1.5% in the first three months of 2021 but showed strong growth in March, according to new figures from the Office for National Statistics (ONS).

Across the first quarter, GDP shrank by 2.5% in January and then grew by 0.7% in February and 2.1% in March – the fastest monthly growth since August 2020.

“The strong recovery seen in March, led by retail and the return of schools, was not enough to prevent the UK economy contracting over the first quarter as a whole, with the lockdown affecting much of the services sector,” explained Darren Morgan, ONS director of economic statistics.

“However, construction grew strongly over the quarter and, in March, was above its pre-pandemic level.

“Manufacturing also recovered from an initial fall, increasing strongly in February and March, as businesses continued to adapt and make themselves Covid-19 secure.”

March’s GDP is still 5.9% smaller than in February 2020, before the first lockdown, and 1.1% below the initial recovery peak in October 2020.

But economists are optimistic that growth will continue over the course of the year.

“The first quarter should mark the low point for the economy in 2021,” said Tej Parikh, chief economist at the Institute of Directors.

“The lockdown, and added costs of navigating new trading terms with the EU, limited many businesses’ trading activities at the start of the year. Meanwhile, the vaccine rollout, extension of support measures at the Budget, and the roadmap to reopen the economy has helped build directors’ confidence for the months ahead.”

UK economy expected to bounce back by end-2022

The UK economy will return to its pre-pandemic level by the end of 2022, according to a new analysis by the National Institute of Economic and Social Research (NIESR).

In its spring 2021 economic outlook, the think tank said it expected the economy to grow by 5.7% this year – an upgrade from its previous estimate for growth of 3.4% – and recover to its pre-pandemic peak in the last quarter of 2022.

The revised forecast comes after a smaller than expected fall in first-quarter GDP and the projected re-opening of the remaining affected sectors, thanks to the successful vaccination programme. The main downside risk remains a resurgence of the Covid-19 virus, due to the rise of new variants or the failure of vaccines, and the UK will not be physically or economically protected from a failure to control the virus globally, the authors noted.

NIESR now anticipates that unemployment will peak at 6.5% in the final quarter of this year, based on an assumption that around 450,000 of those remaining on furlough in September will not be taken back after the scheme ends.

CPI inflation is forecast to rise over the coming months, reaching 1.8% in the fourth quarter of 2021, before falling to 1.5% at the end of 2022 and settling just below the 2% target between 2023 and 2025.

NIESR also took the opportunity to call for a “serious rethink” of fiscal policy.

“Prior underinvestment in health and social care capacity had devastating consequences in 2020 and also contributed to the UK’s relative economic underperformance during the pandemic,” the report argued.

“The long-term challenges of low wage growth, slow productivity and inequalities across regions and between groups of people have not been resolved by Covid-19; indeed, the risk is that they have been exacerbated.”

UK business activity bounces back in March

Business activity in the UK private sector returned to growth in March, thanks to a rebound in the services sector.

The growth was driven by the fastest increase in service activity since August 2020, according to the latest report from IHS Markit and the Chartered Institute of Procurement & Supply (CIPS).

The headline seasonally adjusted IHS Markit/CIPS Flash UK Composite Output Index stood at 56.6 in March, up from 49.6 in February and above the crucial 50.0 mark, which indicates growth, for the first time in three months.

It was also the first time that service sector activity (56.8) outpaced manufacturing production growth (55.6) since the start of the pandemic.

“The surge in business activity is far stronger than any economists expected, according to Reuters polls, and hints at only a modest contraction of GDP during the first quarter, adding to evidence that the economy has shown far greater resilience in the third lockdown compared to the first,” commented Chris Williamson, chief business economist at IHS Markit.

“The encouraging readings on future expectations, job creation and new order inflows meanwhile all point to robust economic growth in the second quarter, especially if virus restrictions are lifted further.”

Williamson added, however, that there are still concerns over supply chain delays, a continued fall in exports and sharply rising prices, all of which are making life difficult for many companies.

And Covid-19 restrictions are likely to curb the overall pace of economic growth for some time to come, especially if there is a third wave of infections, he concluded.

Now is ‘not the time’ for tax rises, MPs say

Tax increases in the upcoming Budget could undermine the UK’s economic recovery from Covid-19, the Treasury Committee has warned.

In a cross-party report published as part of its Tax After Coronavirus inquiry, the committee said that “now is not the time for tax rises or fiscal consolidation”.

It added, however, that “significant fiscal measures, including revenue raising, will probably be needed in future”.

The Government’s ‘tax lock’ manifesto commitment on income tax, national insurance and VAT is expected to come under pressure, and a “moderate” increase in corporation tax could raise revenue without damaging growth, the committee argued.

The report also called for reform of stamp duty land tax (SDLT) and said that the Government should support businesses by introducing a temporary three-year loss carry-back for trading losses.

Mel Stride MP, chair of the Treasury Committee, told the BBC it was “almost inevitable” that some taxes would be increased.

Speaking to BBC Radio 4’s Today programme, he said: “Putting up taxes is in general not a great thing to do but we are where we are and I think the committee view is that looking at income tax and looking at corporation tax is… the right way to go.”

Stride added: “Each 1% increase in corporation tax raises about £3bn so I think… [it] is almost inevitable that some level of rise in going to occur.”

Chancellor Rishi Sunak will unveil the Budget on Wednesday.

UK economy ‘to get worse before it gets better’

The UK economy will get worse before it gets better, Chancellor Rishi Sunak has warned.

In a speech to MPs, Sunak said that new national restrictions to control the spread of coronavirus are necessary but will have a “further significant economic impact”.

Fiscal stimulus measures provided so far amount to more than £280bn.

Alongside the introduction of new restrictions, the Government is providing another £4.6bn to protect UK jobs and businesses, the chancellor said.

For example, businesses in England that are legally required to close — such as those in retail, hospitality and leisure — can claim one-off grants of up to £9,000 for each of their premises, benefitting over 600,000 businesses.

Additionally, local authorities will be distributing discretionary funds of half a billion pounds to support local businesses in their areas. The furlough scheme has also been extended until the end of April 2021.

“Sadly, we have not, and will not, be able to save every job and every business,” Sunak said.

“But I am confident that our economic plan is supporting the finances of millions of people and businesses.”

UK could be heading for double-dip recession

Activity in the UK’s private sector contracted in November as the national lockdown in England ended four months of expansion, according to early data.

The IHS Markit/CIPS Flash UK Composite PMI is down to 47.4 so far in November — the first time the index has gone below 50 since June. Any score under 50 represents a decline in activity.

This early “flash” reading of the index compares to a level of 52.1 in October.

The downturn was driven by the fastest reduction in service sector output since May as pubs, restaurants and other leisure and hospitality businesses closed under new Covid-19 lockdown measures.

Manufacturing was largely unaffected by the lockdown and this is reflected in the manufacturing PMI, which rose to 55.2, up from 53.7 in October and the highest since August.

Stockpiling the before end of the Brexit transition period on 31 December 2020 contributed to the boost in manufacturing.

Chris Williamson, chief business economist at IHS Markit, warned that the November survey data points to a double-dip recession, with the latest lockdown measures causing business activity to collapse across much of the economy.

He added: “Some comfort comes from the data suggesting that the impact of the lockdown has not been as severe as in the spring, and manufacturing has also received a significant boost from inventory building and a surge in exports ahead of the UK’s departure from the EU at the end of the year, providing a fillip for many companies.

“However, while the lockdown will be temporary, so too will this pre-Brexit boost.”