U.K. Economy’s Faster Rebound Not Enough to Recoup Covid Losses
The U.K. economy emerged from the winter lockdown more strongly than previously reported, but not nearly enough to claw its way back to its pre-crisis size this year.
Gross domestic product rose rose 5.5% in the second quarter instead of the 4.8% earlier estimated, official figures published Thursday show. The data, which reflected the reopening of stores and the hospitality industry, mean the economy was still 3.3% smaller than it was before the pandemic struck.
Hopes that the shortfall might be made up this year are already fading, with consumers and businesses facing the twin headwinds of accelerating inflation and supply chain problems. That will leave the U.K.’s recovery trailing most advanced economies, with the U.S. already recouping pandemic-induced losses and the euro area set to follow by the end of the year.
Slower growth in the final three months of the year could force the Bank of England to hold off raising interest rates until mid-2022. Financial markets expect the BOE to start raising borrowing costs as early as February to tame surging prices.
For now, assuming the economy follows the path expected by the BOE for the remainder of the year, output would still be 1.3% below levels before the crisis started.
The BOE last week sharply downgraded its third-quarter growth forecast to 2.1% after firms faced shortages of workers and materials and a resurgence of coronavirus cases made consumers more reticent about spending. Economists say its 2% forecast for the final three months of 2021 is looking increasingly optimistic.
“The U.K. enters the final stretch of 2021 facing the challenging mix of slowing growth and rising inflation,” Dan Hanson, senior economist at Bloomberg Economics, wrote in a report. “As a result, we don’t expect the economy to reach its pre-pandemic level until the middle of next year -- that’s six months later than we previously forecast.”
Second-quarter data published released Thursday by the Office of National Statistics showed government spending, exports and business investment were all stronger than previously estimated.
Separate ONS figures showed that consumers saved 11.7% of their income in the second quarter. The ratio was down from a revised 18.4% in the first quarter, when the country was under a third national lockdown to contain the coronavirus. That’s above levels of less than 7% prior to the pandemic.
The current account deficit, the gap between money coming into the U.K. and the flows leaving, narrowed unexpectedly to 8.6 billion pounds ($11.6 billion). That was about half the rate expected and 1.5% of GDP. Trade in goods and services swung to a small surplus, offsetting a wider deficit on investment income.
There were upward revisions to government spending that reflected better data on health. Revisions to exports and imports meant that trade contributed to growth in the second quarter instead of acting as a drag.
Industrial production, construction and services were also all stronger than previously estimated.
©2021 Bloomberg L.P.