It is three years this month since the UK went into lockdown and the path of the economy over that period is now strikingly clear. There was an instant collapse in activity that reduced output by more than a quarter followed by a two-stage bounceback interrupted by a second lockdown.
By the end of 2021, the economy – as measured by gross domestic product (GDP) – was pretty much back to where it was before the coronavirus pandemic struck. Over the past 12 months it has remained at that level rather than returning to its pre-lockdown growth path.
This underlying pattern held true in January despite the marginally better performance of the economy. The 0.3% growth month-on-month was largely down to a number of one-off factors: the return of Premier League football after the World Cup, postal services being back to normal after pre-Christmas strikes, and more pupils in classrooms after parents removed children from school to a greater extent than normal in December. Without those factors, output would have been flat.
Jeremy Hunt took comfort from the fact the economy is showing more resilience than expected but rightly noted there was a “long way to go”. The good news for the chancellor is that the recession predicted by the Bank of England last November has yet to materialise, and even if it does come to pass is likely to be shorter and more shallow than expected last autumn. Higher growth means stronger tax receipts, lower borrowing and some extra wriggle room for Hunt in next week’s budget.
The bad news is that it is going to be some time before the economy benefits from lower global gas prices and falling inflation. GDP is not going to do much more than edge sideways again this year, if that, and even after beating forecasts in January it is still possible the economy will contract in the first quarter. The boost to private healthcare noted by the ONS is an indication of the effect on the economy of this winter’s widespread industrial action.
As Samuel Tombs, the UK economist with Pantheon Macroeconomics, said the full impact of rising interest rates has yet to be felt but will increasingly be felt by consumers and businesses. Hunt says next Wednesday’s budget will outline the “next stage” of the government’s growth plan. It will need to because the economy is going nowhere.
