The good news is that the UK’s economy is not contracting. The bad news is that it is not really growing either. The latest data from the Office for National Statistics showed that GDP rose by 0.2 per cent in April following a fall of 0.3 per cent in March. Quarterly growth, the less volatile measure preferred by many economists, suggests that Britain is essentially flatlining in economic terms, with growth of just 0.1 per cent.
Things could have been a lot worse. It was not too long ago that most analysts, including this author, expected a recession. The consensus though has shifted. Earlier this month the OECD, an international economic organisation, revised its forecast for the UK up from -0.4 per cent to 0.3 per cent. This followed similar upgrades by both the IMF and the Bank of England.
So why has the UK so far avoided a recession? Other than blind luck, which always plays a role in economic out-turns, three major factors lie behind the more positive outlook. Firstly, global energy prices have fallen sharply. The wholesale price of natural gas is down more than 60 per cent from the levels witnessed last autumn and winter. While still around twice as high as two years ago, energy prices are no longer able to inflict catastrophic damage on the economy.
Because the UK intervened to cap energy bills at an average of £2,500 in 2022, households never felt the full extent of the sharp rise in wholesale prices and are not yet benefiting from their fall either. But lower energy costs are providing more immediate relief for companies and keeping the costs of the government’s support lower than once feared.
[See also: Why recessions make the rich richer]
Though the government can claim little credit for developments in international energy markets, it does deserve some praise for its handling of fiscal policy. While adopting the language of austerity, in a bid to exorcise the ghost of Kwasi Kwarteng from the Treasury, Jeremy Hunt has, in reality, deferred much of the pain of deficit reduction and has continued to provide fiscal support such as the energy price guarantee and the inflation-linked 10.1 per cent rise in benefits and pensions.
Alongside lower energy prices and loose fiscal policy, the economy has been sustained by surprisingly resilient consumer spending. Average real wages may now be back to their 2005 level but the UK’s households have continued to spend. Consumer-facing services – such as shops and restaurants – experienced growth of 1 per cent in the month of April (though output is still around 9 per cent lower than before the Covid-19 pandemic).
Exactly what lies behind this resilience is harder to say. Consumer confidence remains low. But it may be a combination of those households who accumulated savings over the pandemic running them down and others resorting to borrowing to make ends meet. Of course neither factor can continue forever if wages continue to be squeezed.
But while the outlook is not as bad as feared, this should not be treated as genuinely good news. Economic stagnation is hardly a success – monthly GDP is just 0.3 above its February 2020 level – and for most households it has felt as if Britain has been in recession for at least a year. The squeeze on family incomes remains the largest since records began in 1956-57.
Some British commentators have derived a certain schadenfreude from Germany’s failure to avoid recession – partly owing to its more direct exposure to Russia. But its performance is not representative of the continent at large. While the OECD now expects the UK economy to grow by 0.3 per cent this year and 1 per cent in 2024 the equivalent forecasts for the eurozone are 0.8 per cent and 1.5 per cent.
More worryingly for the future, Britain’s inflation appears particularly entrenched. Consumer prices index (CPI) inflation rose at an annual pace of 8.7 per cent in April in the UK compared to 7.6 per cent in Germany, 6.9 per cent in France and 3.8 per cent in the US. Only Argentina and South Sudan experienced bigger increases in underlying inflation than Britain last month.
It is this uncomfortably high and persistent inflation that has prompted the Bank of England to raise interest rates 12 times in succession since December 2021, from a record low of 0.1 per cent to 4.5 per cent, the highest rate since the 2008 financial crisis (the equivalent rate for the European Central Bank is just 3.25 per cent). Until relatively recently, many expected the Bank of England to pause at this point but so stubborn is inflation that markets are now pricing in a base rate of 5.75 per cent by early next year.
It takes time for the full impact of higher rates to be felt, a period usually described as “long and variable” by central bankers. The withdrawal of more than 800 mortgage deals is already a problem for first-time buyers and those hoping to move but as fixed-term mortgage rates expire and more households shift to higher bills, the interest rate shock will become ever larger. The resilience of consumer spending will be severely tested in the quarters ahead.
Barring an unforeseen shock, two consecutive quarters of negative growth – the usual definition of a technical recession – should hopefully be avoided. This, though, is of little comfort to households enduring a record fall in living standards. Britain’s economy might not be shrinking but it remains in a long slump.
[See also: The age of greedflation]