A weaker-than-expected recovery from the coronavirus pandemic has left Britain the only G7 country with a smaller economy than at the start of 2020, which officials say is likely to further undermine government tax-cutting measures.
Ahead of the Prime Minister and Chancellor’s meeting with the head of the government’s independent forecaster on Friday morning, the Office for National Statistics (ONS) released figures showing the economy is not 0.6% larger than February 2020, but a It was down 0.2% on a combination of a deeper recession during the pandemic and a weak recovery.
A better-than-expected performance in the second quarter of this year, which reversed a previous estimate of a 0.1% decline to a 0.2% rise and revised a view that the UK was in recession through June, was not enough to boost GDP growth enough to recover from the first lockdowns of 2020, which shut down large parts of the economy.
Analysts said Richard Hughes, head of the Treasury Department’s independent forecaster, the Office for Budget Responsibility, would be forced by the new numbers to take a tough stance on assessing the impact of more borrowing on public finances.
All other major G7 economies, including France and Italy, recovered strongly enough to be larger than in February 2020.
“Despite the better news on how the economy performed in the second quarter, the overall picture is that the economy is in worse shape than we previously thought,” said Paul Dales, economist at Capital Economics.
“And that was before the full impact of the surge in inflation and the rise in borrowing costs was felt.”
The Bank of England said earlier this month that it understood the UK economy was already in recession after forecasting a 0.1% contraction in third-quarter GDP, resulting in two consecutive quarters of negative growth would, but the ONS estimate of growth in the second quarter shows that while the economy is weak, it is unlikely to enter a recession by the end of the year.
Separate data showed that house prices have not risen month-on-month for the first time since July 2021, a recent sign of the market slowdown caused by pressure on the cost of living and rising interest rates.
Kwasi Kwarteng released an economic plan last Friday that he said would boost growth through tax cuts.
However, investors reacted to the mini-budget by selling the pound and selling UK government bonds, increasing the interest bill paid by the Treasury.
Samuel Tombs, UK chief economist at Pantheon Macroeconomics, said the figures suggested the damage Covid-19 and Brexit had done to the economy’s ability to grow was even greater than previously thought.
“These revisions will force the OBR to further downgrade its estimates of future potential GDP,” he said.
The recent turmoil in UK financial markets has also highlighted the UK’s large current account deficit. The amount by which the value of imports exceeds exports has deteriorated since the 2008 financial crisis and the Brexit vote, although the value of the pound has fallen sharply, making exports cheaper.
ONS data showed the current account gap narrowed to £33.8 billion in the April-June period, or 5.5%, from a deficit of £43.9 billion in the first quarter, which has been revised down from a previous estimate.
However, the January-March deficit remained the largest on record, the ONS said, revealing the difficulties British exporters are struggling to find markets for their products and services.
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