UK economy grew faster than previously estimated in second quarter

The UK economy grew faster than previously thought in the second quarter, thanks to a stronger performance from the healthcare sector and the arts than initial estimates had captured.

The Office for National Statistics said UK gross domestic product increased by 5.5 per cent in the second quarter, after being revised up from the first estimate of a 4.8 per cent increase.

This means the economy is now 3.3 per cent below its level in the fourth quarter of 2019, before the pandemic struck, up from the previous estimate of 4.4 per cent below.

The latest data showed “health services and the arts performing better than initially thought”, said Jonathan Athow, deputy national statistician for economic statistics at the ONS.

The revision “raises the risk that the Bank of England will hike interest rates sooner than our forecast of May 2022,” said Ruth Gregory, senior UK economist at Capital Economics.

Earlier this week, BoE governor Andrew Bailey said every member of the monetary policy committee was ready to raise interest rates before the end of the year if needed to prevent higher inflation from becoming persistent.

“The upward revision to GDP in the second quarter brings the UK economy’s performance in line with other G7 economies,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The gap between current UK growth levels and its pre-pandemic peak is now identical to that seen in Germany, similar to the 3.2 per cent shortfall in France, and better than the 3.8 per cent shortfall in Italy. However, the UK rebound remains behind that of the US economy which has already recovered to above pre-pandemic levels.

Line chart of Index, Q4 2019=100 showing UK second-quarter GDP was just 3.3% below pre-pandemic levels

Despite the upward revision, more timely monthly figures showed that the recovery largely stalled in July, while separate data from the BoE on Wednesday revealed that consumers saved rather than spent in August.

Martin Beck, senior economic adviser to the EY ITEM Club, said that the adverse effect of rising prices and supply problems on spending power and sentiment meant the recovery is looking more “fragile”.

Tombs expect households’ disposable income to drop in the final quarter due to a withdrawal of fiscal support, including the end of the furlough scheme on Thursday, and the surge in energy prices.

Services output was strongly revised up by 0.8 percentage points, while investment was estimated to have expanded 0.8 per cent in the second quarter instead of falling 0.5 per cent as per initial estimates. Yet, business investment was still around 13 per cent below its pre-pandemic levels.

Government consumption was also much stronger than previously thought and rose by 8.1 per cent, upwardly revised from the first estimate of 6.1 per cent.

The ONS also revised up the UK economic growth by 0.5 percentage points in the third quarter last year. The revised figures also show households have been saving less in recent years than previously thought.

A strong rise in household spending between April and June meant the household savings ratio decreased to 11.7 per cent, compared with 18.4 per cent in the first quarter — though this was still the second-highest level since records began in 1963, but lower than 20 per cent of initial estimates.

Savings, which are effectively extra cash consumers can spend on the economy when they feel confident enough, remained above the 2000-2019 average of 8.5 per cent, suggesting that “fuel for further growth . . . is not exhausted,” said Beck.


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