UK economy closer to pre-Covid levels despite Q3 downgrade

[LONDON] THE UK economy has recovered from the pandemic faster than previously thought despite a slower recovery in the three months to September.

The Office for National Statistics (ONS) said gross domestic product (GDP) is now 1.5 per cent smaller than at the end of 2019, an improvement on its previous estimated shortfall of 2.1 per cent.

Upgrades to GDP throughout 2020 and early 2021 leave the economy better placed to absorb the shock of any new restrictions to slow the spread of the omicron variant of coronavirus. GDP grew 1.1 per cent in the third quarter, slower than the previous estimate of 1.3 per cent.

The latest figures suggest the economy was losing momentum before supply shortages set in, inflation took off and Omicron emerged.

The government has refused to rule out further economically damaging restrictions after Christmas to prevent the health service being overwhelmed.

The ONS revisions showed Britain weathered the first year of the pandemic better than thought, with the economy shrinking 9.4 per cent rather than 9.7 per cent. That remains the biggest contraction since 1921.

Despite the upgrades, the economy is unlikely to return to its pre-pandemic size until well into 2022.

That milestone has already been passed by the US and is set to be achieved by France in the current quarter. Only Spain and Japan among advanced economies have more lost output to make up.

UK households continued to save a significant portion of their disposable income in Q3 as caution reigned despite the ending of lockdown restrictions.

The saving ratio was 8.6 per cent between July and September, the ONS said Wednesday (Dec 22) .

That's down from 10.7 per cent in the second quarter but well above the 5 per cent average prior to the pandemic. Household consumption was the principle driver of growth in Q3 and, as behaviour returned to normal with the easing of restrictions and the reopening of the economy in July, hospitality, arts, entertainment and recreation were the industry sectors that saw the fastest pick-up.

Offsetting that was a fall in underlying inventories, which was likely to reflect some of the recent supply-chain challenges, the ONS said.

A lack of opportunities to spend during lockdowns and a limited willingness to splurge when curbs were lifted mean Britons have amassed huge amounts in bank accounts.

Economists expect those excess savings to support consumer spending as soaring inflation and looming tax increase erode living standards.

Growth is expected to slow to a crawl in the current quarter amid worsening supply-chain disruptions and a surge in coronavirus cases that is keeping customers away from stores and restaurants. The economy could contract in the early months of 2022 if new restrictions are announced.

The current account deficit, the gap between money coming into the UK and the flows leaving, widened to £24.4 billion (S$44.3 billion) last quarter. That's the equivalent of 4.2 per cent of GDP. The deterioration was largely due to a sharply wider trade deficit. BLOOMBERG