GDP figures improve but UK isn’t booming

The first quarterly expansion in a year. Recession receding into the rear-view mirror. Faster growth in early 2024 than any other member of the G7 group of leading industrial nations. When you are in as deep a political hole as the current government you seize on any good news, and there was plenty for Jeremy Hunt to choose from in the figures from the Office for National Statistics. The figures were proof that the economy was returning to “full health for the first time since the pandemic”, the chancellor said.

To be sure, the UK has emerged from recession but the downturn in the second half of 2023 was a much more modest affair than some of the monster downturns of the past 50 years. The hollowing out of manufacturing in the early 1980s was a genuine slump, as was the housing market crash in the 1990s and the near collapse of the banks in the global financial crisis of 2008.

The bigger picture is that Britain’s growth performance during the current parliament has been extremely weak. National output as measured by gross domestic product is only 1.7% above pre-pandemic levels, and adjusted for a rising population per capita, growth has actually fallen – by 1.2%. As things stand, this is on course to be the first parliament in living memory to have seen falling living standards over the term.

There are reasons for that. The economic narrative of the past five years has been shaped by two huge external shocks. The response to the global pandemic that arrived in the UK in early 2020 meant the economy contracted by almost 25% in March and April of that year. The economy was almost 10% smaller in 2020 than it was in 2019.

Britain was then hit by a second setback: the Russian invasion of Ukraine. Rising energy costs meant inflation, already rising as global demand soared in the post-lockdown period, was given another upward twist. Central banks raised interest rates aggressively in response.

Smoothing out the ups and downs of the quarterly GDP figures, the economy went sideways in 2022 and 2023. The two successive quarters of negative growth in the second half of 2023 met the technical definition of recession but the downturn might eventually be revised away when fresh data comes in. Most forecasters were expecting something worse, with the Bank of England predicting the longest recession in 100 years.

There has also been a significant divergence between sectors and between regions. Services, which make up about 80% of national output, have done a lot better than manufacturing or construction.

Consumer-facing services have been at the sharp end of the cost of living crisis. But even there, there have been winners and losers: pubs have done poorly but art galleries and sporting events have done well.

The patchy performance of the service sector is something that has also been picked up by the Bank of England’s regional agents, who act as the eyes and ears of interest rate setters on Threadneedle Street’s monetary policy committee.

The strong performance of financial and business services has meant the gap between London and the south-east and the rest of the country has widened. Prof Adrian Pabst, a deputy director for public policy at the National Institute of Economic and Social Research, says the West Midlands has done particularly poorly, a function he says of a lack of investment and the region’s manufacturers being hard hit by Brexit red tape.

“Despite some efforts, regional inequalities are persistent and, in some cases, getting worse” Pabst said.

Survey evidence has suggested the economy’s strong start to 2024 has continued into the second quarter. But as Rachel Reeves pointed out last week, there is currently a gap between what the ONS says and what the public thinks. “We won’t have turned a corner until working people feel they are better off”, the shadow chancellor said. At present, there is little evidence that they do.