Britain’s economy made a lacklustre start to 2023 as inflation ate into households’ disposable income, official figures showed on Friday, and economists see a risk of recession ahead as higher interest rates keep up the pain even as inflation eases.
The economy grew by just 0.1 per cent in the first three months of the year, unchanged from an initial estimate by the Office for National Statistics’ (ONS), and leaving output 0.5 per cent lower than it was in the final quarter of 2019, before the COVID-19 pandemic.
Households dug into their savings – although the overall saving ratio remained higher than before the pandemic – and the cost of living increased faster than incomes.
The squeeze on households looks set to continue, as the Bank of England raised interest rates to a 15-year high of 5 per cent in June and investors see little sign that it is about to end its tightening cycle.
“The final Q1 2023 GDP data confirms that the economy steered clear of a recession at the start of 2023. But with around 60 per cent of the drag from higher interest rates yet to be felt, we still think the economy will tip into one in the second half of this year,” said Ashley Webb, an economist at consultancy Capital Economics.
While the BoE forecast last month that inflation would drop to just over 5 per cent by the end of the year, BoE Governor Andrew Bailey said last week that inflation was proving stickier than expected after it held at 8.7 per cent in May.
Britain’s economic recovery since the pandemic has been much slower than almost every other big advanced economy, though Germany has struggled too and its economy in the first quarter was also 0.5 per cent smaller than before the pandemic.
In annual terms, Britain’s economy had grown just 0.2 per cent by the end of the first quarter.
Some economists said the weak GDP data stood at odds with more robust trends for jobs, wages and consumer confidence, and further sluggish growth was more likely than outright recession.
“We expect unemployment to inch up, but only slowly and to a limited degree,” HSBC economist Liz Martins said.
INFLATION SQUEEZE
British households have been put under pressure by a surge in inflation, which hit a 41-year high of 11.1 per cent last year after Russia’s invasion of Ukraine sent natural gas prices soaring, and has been slow to fall since.
Friday’s figures showed households’ real disposable income – money available after adjusting for inflation, taxes and benefits – was 0.8 per cent lower than the previous quarter. This was the biggest drop since the second quarter of 2022, and 0.5 per cent lower than a year earlier, reflecting higher costs for electricity, gas and food.
There were also signs that people are saving less in response to the increased cost of living, as the savings ratio fell to 8.7 per cent in the first quarter from 9.4 per cent in the quarter before, its lowest level since the second quarter of 2022 though well above its pre-pandemic average of just over 5 per cent.
The ONS recorded a net withdrawal of money by households from bank accounts for the first time since records began in 1987. As well as funding living expenses, economists said these moves could reflect richer households moving savings to investments that pay a higher return, as interest rates on many bank accounts have failed to keep up with rising BoE rates.
Mortgage repayments also exceeded new borrowing by a record 5.2 billion pounds ($6.6 billion), as people became warier about taking out new debt at a time of sharply rising interest rates.
House prices in June were 3.5 per cent lower than a year earlier, the biggest annual fall since 2009, according to other figures released on Friday by the Nationwide Building Society, and BoE data on Thursday showed trends for mortgages and bank accounts similar to those in the ONS figures extended into May.
There was some brighter news on business investment, which rose by 3.3 per cent in the first quarter, the biggest increase in a year. However, the ONS reported anecdotal evidence it was driven by companies rushing to invest ahead of the March 31 expiry of the “super-deduction” tax break on capital projects.
That policy was replaced by a new one of full expensing for three years, but businesses have long complained that the lack of long-term clarity over corporate tax policy had fostered a stop-start approach to investment in Britain.
Britain’s underlying current account deficit also narrowed to 2.6 per cent of GDP from 3.3 per cent of GDP in the final quarter of 2022, after stripping out volatile flows of precious metals, as preferred by the ONS.
The total current account deficit including precious metal flows totalled 10.8 billion pounds in the first quarter, above economists’ forecast of 8.5 billion pounds in a Reuters poll and equivalent to 1.7 per cent of GDP.
($1 = 0.7914 pounds)