October 24, 2021

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Divergent views point to uncertain outlook for UK economy

UK economic growth updates

Most forecasters were able to boast on Thursday about their accuracy in predicting the UK economy would grow 4.8 per cent in the second quarter. But with divergent views about the second half of 2021, far fewer will be able to look back on this year with a flawless record. 

Beneath the headlines of the first estimate of the national accounts, the statistics published by the Office for National Statistics gave succour to both optimists and pessimists.

There was evidence to suggest the best days of the recovery are in the past and simultaneously that the rapid growth in the second quarter was a sign of what is possible when Covid-19 subsides.

While in the second quarter, gross domestic product was 4.4 per cent below the pre-pandemic peak of the fourth quarter in 2019, most economists believe that the economy will recover the lost output from the pandemic in the fourth quarter of the year.

But that would still leave living standards about 3 per cent below the levels expected for the end of 2021 before coronavirus struck. 

For the optimists, perhaps the most important element of the data was that household consumption accounted for 4.1 percentage points of the 4.8 per cent gain in gross domestic product in the second quarter. With consumption still 7.3 per cent below its 2019 peak, the figures indicated there was room for people to decrease their savings and splash the cash further in the second half of the year. 

Bar chart of Change in spending, Q2 21 Vs Q4 19 (%) showing Fortunes in different parts of the economy have varied in the pandemic

There is even more scope for business investment to recover, but that will depend on companies feeling confident that prospects for the wider economy are sound.

Allan Monks, UK economist at JPMorgan, said that on balance the underlying trends in the second quarter confirmed the UK recovery was “strong with plenty of scope for more to follow”.

But Monks and other economists tempered any optimism with warnings that the Delta coronavirus variant appeared to have sapped consumer confidence in July, reducing the chances that the pace of recovery would continue in the second half of the year.

The rise in government consumption above late 2019 levels also shows the downside risks with Rishi Sunak, chancellor, determined to bring spending back down after two years of crisis-related firefighting.

Philip Rush, founder of consultancy Heteronomics, said that the importance of consumer-facing services in the second quarter boded ill for the months ahead and accused the Bank of England of “peak optimism” in its August forecasts.

“Restaurant bookings and vaccinations rates dropped in July,” Rush noted, adding that “most other sectors are only limping up from still depressed levels”.

Other economists also voiced caution about projecting second quarter gains into the future. Rob Wood, UK economist at Bank of America, said that sustaining growth would become more difficult after closing four-fifths of the gap that opened up in the crisis. “The major reopening gains are behind us and policy turns into a headwind from a tailwind soon,” he said.

According to the ONS, there are some technical reasons to be more optimistic about growth in the months ahead because unusual quirks depressed some elements of the June data.

Output of the mining and quarrying sector, including North Sea oil, fell 11.9 per cent in June alone, dragging the whole production sector down 0.7 per cent. This, the statistical agency said, was caused by temporary closures for maintenance of oil rigs, leaving monthly North Sea oil production at its lowest level since monthly records began in 1997.

Kallum Pickering, UK economist at Berenberg Bank, highlighted other UK-specific features in the figures, especially in the measurement of the public sector, which was now rapidly improving as schools reopened fully, visits to GP surgeries boomed and hospital appointments grew rapidly. Many other countries do not record public sector output in this way, and Pickering said the effect had been to “amplify the UK economic cycle” compared with other comparable economies.

“The UK suffers a bigger than average drop during lockdowns followed by a relatively fast recovery afterwards,” he said.

Looking forward, Financial Times calculations suggest the UK economy will take quite a lot of momentum into the third quarter. Even if there was no improvement from the June level of output in the following three months, the quarterly data would show a 0.8 per cent gain.

Line chart of Monthly GDP index: 2018=100 showing The UK has a strong chance of recovering lost GDP in 2021

That would not, of course, close the remaining gap with the pre-pandemic level of output. For that to happen by October, the economy would need to grow 0.7 per cent every month — a little faster than the rate in May, but considerably less than the 1 per cent recorded in June. If it met most economists’ expectations and recovered lost ground by the end of 2021, it needs to record only 0.4 per cent monthly growth for the rest of this year.

Hande Küçük, deputy director of the National Institute of Economic and Social Research, said that she expected the economy to be on the faster track, at least in the third quarter, with growth “still high by historical standards on the assumption of waning Covid-19 cases and lifting of all domestic restrictions”.

Thereafter, she added, the question of how much longer-term damage was done by the pandemic and how to resolve the inequalities caused by the virus would become most important.

The answers to these questions are unknown at present, but will be of crucial importance in the autumn when Sunak makes long-term public spending decisions based on the Office for Budget Responsibility’s medium term forecasts in late October.

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