Manufacturing is struggling and house prices are sliding. There is precious little money in the kitty for pre-election tax cuts. Inflation is proving hard to shift and strikes by hospital doctors and railway workers are set to continue. The Bank of England is slowly throttling the economy with its increases in the cost of borrowing.
Having dodged the recession bullet last year, there are signs the UK may not do so again in the coming months. Any good news from lower energy prices is outweighed by the impact of higher interest rates, the full effects of which have yet to be felt. It is a rotten prospect for a government that is 20 points behind in the opinion polls and has to fight an election by January 2025 at the latest.
Still, amid all the gloom, the chancellor, Jeremy Hunt, has at least something to be thankful for: Germany rather than the UK is the sick man of Europe and the laggard in the G7.
Revisions to past growth data showed that the UK recovered much more quickly from the pandemic-enforced lockdowns than previously thought. Brexit, it appears, was not as big an impediment to growth as some commentators assumed.
By the end of 2021, the UK had bounced back from Covid faster than Germany, France, Italy and Japan. Only the US and Canada of the major western industrial nations had performed more strongly.
Naturally, the UK’s performance has to be put into context. Even after the fresh look at the data by the Office for National Statistics (ONS), the economy was only 0.6% bigger at the end of 2021 than it was in late 2019.
There’s still not much to choose between the four biggest European economies and Britain may once again slip to the bottom of the G7 league table if and when other countries revise their growth figures for the peak Covid-19 years.
And although the revisions make it harder to blame Brexit for all the UK’s ills, it is still possible to argue that the UK’s economic performance would have been even stronger had it still been in the EU.
That said, a quick glance at the updated ONS growth data shows how it has been Covid-19 and its aftermath that have really shaped the economy since the 2019 election. It was the lockdown – not Brexit – that led to the economy shrinking by a massive 20% in the second quarter of 2020.
It was the furlough wage-subsidy scheme and the range of state support to keep businesses afloat that meant the economy grew by almost 17% in the three months that followed, after restrictions had been eased.
The second lockdown in early 2021 was far less costly in terms of lost activity, with the economy shrinking by just 1% in the first three months of that year. It then grew by 7.3% in the second quarter, in part because businesses had learned how to operate with restrictions in place and in part because the furlough was still in place.
We now know, of course, that the economy’s problems did not end when it had made up the ground lost during the pandemic. As the world opened up in 2021, demand for commodities and finished goods rose sharply, leading to supply bottlenecks.
The mismatch between demand and supply led to a pickup in inflation, which was assumed to be temporary but wasn’t. Inflation was given another upward twist by Russia’s invasion of Ukraine. At a time of labour shortages, workers sought to prevent their living standards being eroded. Fearing a wage-price spiral, central banks slammed on the brakes.
It remains to be seen whether the ONS revises up growth for the period since late 2021 but, as things stand, the UK economy is about 1.5% bigger than it was pre-Covid rather than 0.2% smaller. That compares with an average of 2.8% for the other G7 nations and would still mean it had grown more slowly than any other member of the rich-nation club, bar Germany.
But as Ruth Gregory, of Capital Economics, notes, the economy has been much stronger than previously thought. “The implication is that the UK economy is no longer at the back of the G7 pack and it is not so far behind the average,” she said.
While Hunt was, unsurprisingly, pleased at news of the growth upgrade, he was also careful not to get too carried away. That makes sense, because – as is invariably the case with the UK economy – for every silver lining there is a cloud. Or three clouds in this instance.
For a start, the better performance of the economy in 2021 was confined to certain bits of the service sector: a return to more normal levels of activity in the NHS and a spending binge by consumers. Manufacturing and construction both did less well in 2021 than previously thought. This is the same old UK economy with the same old problems, in other words.
Second, the recovery in the economy had pretty much fizzled out by early 2022. Since then, at least according to the latest available data, growth has pretty much flatlined, up marginally in some quarters and down marginally in others.
Finally, the fact that the economy is stronger than previously thought will do little to dissuade the Bank from continuing with its tough policy stance and may indeed make some Monetary Policy Committee members warier of easing back. Interest rates are close to a peak but look set to remain high for some time to come.
Hunt says the growth revisions show the resilience of the economy but forward-looking indicators of the economy’s health – such as last Friday’s manufacturing purchasing managers’ index – paint a darker picture. They suggest a recession is coming.
