The UK economy is bigger than we thought. There is still a growth problem

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Shoppers on Regent Street in London, United Kingdom, in December 2021

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CNN
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The UK economy has recovered from the Covid-19 pandemic much faster than previously thought. This emerges from major revisions to official statistics, which eliminated the UK’s laggard status overnight.

New data released by the Office for National Statistics on Friday showed that the UK’s gross domestic product at the end of 2021 was actually 0.6% higher than in the last quarter of 2019 – before the pandemic hit – rather than 1.2% lower as previously estimated .

The ONS said just last month that Britain’s GDP had still not reached pre-pandemic size in the second quarter of this year.

The dramatic revisions mean The British economy has grown significantly faster since the end of 2019 and is no longer among the bottom of the G7. It performs better than Germany but still lags behind the US, Canada, Japan, Italy and France.

“Average GDP in other G7 countries is 2.8% above pre-pandemic levels, compared to 1.5% in the UK,” Ruth Gregory, deputy chief UK economist at Capital Economics, wrote in a research note on Friday.

“The conclusion is that the UK economy is no longer at the bottom of the G7 group and is no longer lagging that far behind the average.”

However, economists warned that the better data did not change the overall outlook for the UK It will not hurt growth, nor will it bring relief to households struggling with high inflation and rising borrowing costs.

“Growth in the UK has still been very sluggish, albeit not bottoming out yet,” said Prof Huw Dixon, who leads research on economic measurement at the National Institute of Economic and Social Research.

The revised data “doesn’t change the real economy one bit,” Dixon told CNN. “If you are an ordinary business or household, this will not affect you. It just shows that the measurement was wrong and GDP is slightly higher than we thought.”

John Springford, deputy director of the Center for European Reform, a think tank, added: “The revisions are good news. But the economy has been stagnant since 2021 — and that followed a streak of below-trend growth [2016] Brexit referendum. So although the economy is bigger than we thought, the UK still has a growth problem.”

In 2020, the UK economy suffered its biggest slump in more than three centuries, rebounding sharply from low levels the following year.

The ONS said on Friday that GDP is now estimated to have fallen by 10.4% in 2020, down from the previous 11%. That’s still the sharpest annual fall since the Great Frost of 1709. Annual GDP growth for 2021 was also revised upwards by 1.1 percentage points to 8.7%.

ONS Director of Economic Statistics Darren Morgan said the statistical revisions were due to some larger data that is taking longer to collect.

“If you look at 2020, our broader surveys show that companies were adding to their unsold inventory rather than reducing it,” he told CNN.

For 2021, More recent business surveys showed that retail and wholesale profit margins were holding up significantly better than previously thought, and the public and private healthcare sectors also fared better.

The costs incurred by firms in producing their goods have also been adjusted, which has had a positive impact on the service sector, which accounts for the bulk of GDP, but has had a negative impact on manufacturing.

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On 11 August 2023, shoppers browse the stalls of Petticoat Lane Market against a backdrop of London’s financial district.

UK Treasury Secretary Jeremy Hunt said the country’s faster recovery from the pandemic “shows that those determined to talk down the UK economy have once again been proven wrong.”

But Gregory of Capital Economics said that while the data “suggests that the economy has been much stronger than we previously thought,” it doesn’t significantly improve the overall picture.

“As the UK is likely still suffering from labor shortages, this is no guarantee of future long-term resilience.”

The latest GDP revisions may just reinforce the case for keeping interest rates higher for longer, she added. The data “underscores the need for the Bank of England to monitor demand to contain inflation.”

Nomura economists said the revisions could even increase the risk of a future recession “as there is less pent-up demand.”

The UK is one of the first countries in the world to have revised its GDP estimates for the pandemic period using a more detailed framework, meaning other countries could also change their estimates at a later date.

“It’s important to take this into account when comparing the UK to other countries, and our international comparative position is likely to change as other countries fully compare their datasets over time,” the ONS said.