The manufacturing industry is facing challenges, and house prices are declining. The availability of funds for pre-election tax cuts is limited. Inflation is proving difficult to control, and strikes by hospital doctors and railway workers are expected to continue. The Bank of England is gradually restraining the economy by increasing borrowing costs.
After successfully avoiding a recession last year, there are indications that the UK may not be able to do so again in the coming months. Lower energy prices are outweighed by the impact of higher interest rates, the full consequences of which are yet to be experienced. This is a bleak prospect for a government that is trailing by 20 points in the polls and must face an election no later than January 2025.
Nevertheless, amidst all the gloom, Chancellor Jeremy Hunt has something to be grateful for: Germany, not the UK, is currently the sick man of Europe and the laggard in the G7. Revisions to past growth data have shown that the UK recovered much faster from the pandemic-induced lockdowns than previously believed. Brexit, it seems, did not impede growth as much as some commentators assumed.
By the end of 2021, the UK had rebounded from Covid-19 at a quicker pace than Germany, France, Italy, and Japan. Among major Western industrial nations, only the US and Canada performed better.
Of course, the UK’s performance must be viewed in context. Even after the Office for National Statistics reviewed the data, the economy was only 0.6% larger at the end of 2021 compared to late 2019. The four largest European economies are still closely ranked, and if other countries revise their growth figures for the peak Covid-19 years, the UK may once again fall to the bottom of the G7 league table. While it is more challenging to blame Brexit for all of the UK’s problems, it can still be argued that the UK’s economic performance would have been stronger if it remained in the EU.
Upon examining the updated ONS growth data, it becomes clear that Covid-19 and its aftermath have truly shaped the economy since the 2019 election, not Brexit. The lockdown caused a massive 20% economic contraction in the second quarter of 2020. However, the furlough wage-subsidy scheme and state support helped the economy grow by almost 17% in the following three months after restrictions were eased.
The second lockdown in early 2021 had a smaller negative impact, with the economy shrinking by only 1% in the first three months of that year. It then grew by 7.3% in the second quarter, partly due to businesses adapting to operate with restrictions and the ongoing furlough program.
As the world reopened in 2021, there was a surge in demand for commodities and finished goods, leading to supply bottlenecks. The mismatch between supply and demand fueled inflation, which was initially believed to be temporary but turned out to be persistent. Russia’s invasion of Ukraine further elevated inflation. In a time of labor shortages, workers aimed to protect their living standards, triggering concerns of a wage-price spiral and prompting central banks to tighten monetary policy.
It remains to be seen if the ONS will revise growth figures for the period since late 2021, but as of now, the UK economy is about 1.5% larger than it was before the pandemic, rather than 0.2% smaller. This growth rate is lower than the average of 2.8% for the other G7 nations and still places the UK behind other countries, except for Germany, in terms of economic growth. Nevertheless, economists like Ruth Gregory of Capital Economics believe that the UK’s economy has been stronger than previously estimated.
While Hunt expressed satisfaction with the growth upgrade, he remains cautious. This is typical for the UK economy, as every positive aspect is accompanied by challenges. In this case, there are three challenges to consider. First, the economy’s better performance in 2021 was limited to certain sectors, such as the NHS and consumer spending, while manufacturing and construction did not fare as well. This indicates that the UK economy still faces familiar problems.
Second, the economic recovery had largely stalled by early 2022. According to the latest available data, growth has been stagnant, with small gains in some quarters and losses in others.
Finally, the fact that the economy is stronger than previously thought may not deter the Bank of England from maintaining its strict policy stance. In fact, it could make some Monetary Policy Committee members even more cautious about easing. Interest rates are near their peak and are expected to remain high for the foreseeable future.
Hunt acknowledges the resilience shown by the economy in light of the growth revisions, but indicators such as the manufacturing purchasing managers’ index suggest a darker outlook and the possibility of a recession.
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