UK growth is a beacon of hope – and the clouds suggest an impending recession | Economic growth (GDP)

The manufacturing industry is struggling and real estate prices are falling. There is very little money in the kitty for pre-election tax cuts. Inflation is proving difficult to control and strikes by hospital doctors and railway workers are expected to continue. The Bank of England is slowly suffocating the economy by raising the cost of borrowing.

After avoiding recession last year, there are signs that the UK may not do so again in the months to come. Any good news related to lower energy prices is offset by the impact of rising interest rates, the full effects of which are yet to be felt. It’s a rotten prospect for a government trailing 20 points in opinion polls and due to stand for election no later than January 2025.

Yet amidst all this gloom, Chancellor Jeremy Hunt has at least something to be grateful for: Germany, rather than the UK, is Europe’s sick man and G7 laggard. Revisions to past growth data have shown that the UK has recovered much faster from pandemic-imposed lockdowns than previously thought. It seems that Brexit was not as big of a barrier to growth as some commentators thought.

By the end of 2021, the UK had recovered from Covid faster than Germany, France, Italy and Japan. Among the major Western industrial nations, only the United States and Canada performed better.

Naturally, the UK’s performance needs to be put into context. Even after a fresh look at data from the Office for National Statistics, the economy was just 0.6% bigger at the end of 2021 than it was at the end of 2019. There’s still not much to choose from between Europe’s four biggest economies and Britain could once again slip to the bottom of the G7 rankings 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 of the UK’s ills, it’s still possible to argue that the UK’s economic performance would have been even stronger if it had always been in the EU.

That said, a quick look at updated growth data from the ONS shows how it is Covid-19 and its aftermath that has really shaped the economy since the 2019 election. That’s the lockdown – not Brexit – which led to a massive 20% contraction in the economy in the second quarter of 2020. the economy to grow by 20%. almost 17% in the following three months, after restrictions were relaxed.

The second lockdown, in early 2021, was far less costly in terms of lost business, with the economy shrinking just 1% in the first three months of that year. It then rose 7.3% in the second quarter, partly because businesses had learned to operate with the restrictions in place and partly because the furlough was still in effect.

Of course, we now know that the economy’s problems did not end once the ground lost during the pandemic was recovered. As the world opened up in 2021, the demand for raw materials and finished goods increased sharply, leading to supply bottlenecks. The mismatch between supply and demand led to a resumption of inflation, supposedly temporary, but which was not. Russia’s invasion of Ukraine further accentuated inflation. At a time of labor shortages, workers sought to prevent their standard of living from eroding. Fearing a wage-price spiral, central banks braked sharply.

It remains to be seen whether the ONS will revise growth up for the period since the end of 2021, but as things stand the UK economy is around 1.5% bigger than it is. was before Covid, instead of 0.2% smaller. This compares to an average of 2.8% for other G7 countries and would still mean that its growth has been slower than that of any other member of the rich country club except Germany. But as Ruth Gregory of Capital Economics points out, the economy has been much stronger than previously thought. “This implies that the UK economy is no longer at the back of the G7 pack and not that far behind the average,” she said.

While Hunt was, unsurprisingly, pleased with the news of the improved growth, he was also careful not to get too carried away. This makes sense, because – as is invariably the case for the UK economy – with every glimmer of hope comes a cloud. Or three clouds in this case.

For starters, the economy’s best performance in 2021 has been confined to parts of the services sector: a return to more normal levels of activity in the NHS and a consumer spending spree. Manufacturing and construction both performed worse in 2021 than previously thought. In other words, it’s the same old British economy with the same old problems.

Second, the recovery in the economy all but stalled in early 2022. Since then, at least according to the latest available data, growth has remained nearly flat, up slightly in some quarters and down slightly in others.

Finally, the fact that the economy is stronger than previously thought will not deter the Bank from continuing its tough policy and may even make some MPC members hesitant to ease policy. Interest rates are near a peak but are expected to remain high for some time to come.

Hunt says growth revisions show the economy’s resilience, but forward-looking indicators of the economy’s health – such as last Friday’s Manufacturing Purchasing Managers’ Index – paint a bleaker picture. . They suggest that a recession is approaching.