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UK Economy Surprises with Growth in the Second Quarter, But Covid Hit was Bigger than Previously Thought

Uk economy grew in Q2

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The ONS says the UK economy expanded in the second quarter of 2022, revising up initial estimates for a contraction of 0.1%, however revisions for the decline suffered during the pandemic were revised significantly lower.

Growth of 0.2% means the UK will have to record quarterly declines in the third and fourth quarters to enter a technical recession.

The ONS said the uptick in growth followed a boost to services output, estimated to have increased by 0.2% in Quarter 2.

There was however continued weakness in the wholesale and retail trade, and health industries.


Composition of UK GDP


 

The ONS also said its estimates show UK GDP contracted by a downwardly revised 11.0% in 2020 (previously 9.3%), reflecting the effects of coronavirus (COVID-19) restrictions.

"The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels," says Paul Dales, Chief UK Economist at Capital Economics.

UK GDP is now estimated to have expanded by an upwardly revised 7.5% in 2021, previously it was 7.4%.

The level of real GDP is now estimated to be 0.2% below where it was pre-coronavirus at Quarter 4 2019.

"Real consumer spending is now thought to be 2.7% below the pre-pandemic peak compared to 0.6% below previously. This is partly because the revisions show that households saved more during the pandemic and have spent less since," says Dales.


UK GDP longer term

Above: "Revisions to GDP have meant a sharper contraction in 2020 followed by a stronger recovery through the coronavirus pandemic" - ONS.


"The downturn in economic activity during 2020 looks even worse than previously thought, and the subsequent recovery even weaker, following the latest set of national accounts revisions," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconics.

The revision comes as the ONS improves its methodology by bringing in new datasets, improved its estimates of the GDP deflator, and reconciled the three separate measures of GDP—output, expenditure and income based—for 2021 for the first time.

"Accordingly, GDP in Q2 2022 was 0.2% below its Q4 2019 peak, rather than 0.6% above it, implying that the damage inflicted to the economy’s supply side by Covid and Brexit is even larger than previously thought," says Tombs.

Looking ahead, most economists are in agreement the economy will fall into recession.

"Although the economy may contract in Q3, if there is a recession it will have started later than we thought," says Dales.

"So despite the better news on the performance of the economy in Q2, the overall picture is that the economy is in worse shape than we previously thought. And that’s before the full drag from the surge in inflation and leap in borrowing costs have been felt," he adds.