Economy

UK narrowly avoids recession as real incomes post first rise since 2021

UK avoided recession in final three months of 2022

The UK economy avoided a recession at the end of 2022 by a narrow margin

Andrew Atkinson and Tom Rees
Fri Mar 31 2023 - 09:36

The UK barely avoided falling into recession towards the end of last year, living standards rose for the first time in more than a year in a sign that the cost-of-living crisis is easing.

Adjusted for inflation, household disposable incomes per head rose 1.2 per cent in the fourth quarter, the Office for National Statistics said on Friday. It follows four consecutive quarters of decline that left families over 3 per cent poorer. Overall growth for the period was revised higher.

The figures will be welcomed by Prime Minister Rishi Sunak, whose Conservative Party trails far behind the Labour opposition with a general election expected next year. But it increases pressure on the Bank of England to raise interest rates further to tackle a resurgence of inflation.

The revival will reinforce hopes that Britain can avoid a recession this year, as predicted by the Bank of England and the Office for Budget Responsibility. With energy costs coming down and wages rising strongly, the central bank last week said it thinks the period of falling real incomes is over.

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Separate figures showed that GDP rose 0.1 per cent in the fourth quarter, better than the zero growth previously recorded. That followed a 0.1 per cent decline in the third, revised from a 0.2 per cent drop. It means Britain dodged a recession last year but output is still 0.6 per cent lower than its pre-pandemic level, making the UK the only G-7 economy that has yet to fully recover.

“The economy performed a little more strongly in the latter half of last year than previously estimated, with later data showing telecommunications, construction and manufacturing all faring better than initially thought in the latest quarter,” said Darren Morgan, the ONS’s director of economic statistics.

Disposable income per head fell 2.3 per cent in 2022 as a whole, the most since 2011, as wages failed to keep pace with runaway inflation.

Stronger-than-expected recent data on retail sales and the the labor market have left forecasters predicting only a small contraction in the first quarter, with many — including the BOE — expecting a bounce back in the following three months.

That’s despite the terms of trade shock caused by energy prices and the fastest monetary tightening since the late 1980s, as the BOE raised rates from 0.1 per cent to 4.25 per cent in 16 months. Money markets are fully pricing in one more 25 basis-point hike and the strong possibility of further action.

A key risk now is that lenders restrict credit in response to the recent concerns over the health of global banks, denting economic activity.

The saving ratio, the proportion of income left over after spending on goods and services, rose to 9.3 per cent from 8.9 per cent. That remains well above pre-pandemic levels and was boosted by government aid to help with energy bills.

It could also suggest deepening consumer caution in the face of the political and financial turmoil that erupted late last year. When excluding pension entitlements, the rate rose to 2.8 per cent from 1.7 per cent.

“Households have a slightly larger buffer than we had expected to cope with rising interest rates,” said Ruth Gregory, economist at Capital Economics.

The services sector grew 0.1 per cent, an improvement on the previous estimate of zero growth. The quarterly growth was driven by support services, with travel agents seeing a big boost as people made plans to get away.

Manufacturing also saw a big improvement, particularly in electronics, optical products, food, beverages and tobacco, after the ONS was able to analyse more granular VAT data. The revised figures meant manufacturing grew 0.5 per cent in the quarter and output in the industry is now 3.6 per cent above pre-pandemic levels, up from a previous estimate of 1.4 per cent.

There was a big downgrade to business investment in the final three months of the year, complicating the outlook. Instead of the 4.8 per cent quarterly growth previously estimated, business investment shrank 0.2 per cent. That left it 2.2 per cent below pre-pandemic levels, when it was thought to have caught up.

The revision could have implications for the government’s official forecasts, which were helped in the March budget by a better outlook for business spending.

The current-account deficit excluding previous metals narrowed to £21.1 billion, (€24 billion) or 3.3 per cent of GDP, in the fourth quarter, from £26.3 billion in the third. A slightly wider trade deficit was more than offset by a sharp increase in the surplus on investment income. -- Bloomberg

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