The UK economy is bigger than we thought. It still has ‘a growth problem’

By Hanna Ziady, CNN

London (CNN) — The UK economy recovered from the Covid-19 pandemic much faster than previously thought, according to major revisions of official statistics that have erased Britain’s laggard status overnight.

New data published by the Office for National Statistics Friday showed that by the end of 2021, UK gross domestic product was actually 0.6% larger than in the final quarter of 2019 — before the pandemic struck — rather than 1.2% smaller as previously estimated.

The ONS had said as recently as last month that UK GDP had still not reached its pre-pandemic size by the second quarter of this year.

The dramatic revisions mean the UK economy has grown much more strongly since the end of 2019 and is no longer the worst performer in the G7, faring better than Germany, although still lagging behind the United States, Canada, Japan, Italy and France.

“Average GDP in other G7 countries is 2.8% above its pre-pandemic level compared to 1.5% in the UK,” Ruth Gregory, deputy chief UK economist at Capital Economics, wrote in a research note Friday.

“The implication is that the UK economy is no longer at the back of the G7 pack and it is not so far behind the average.”

But economists cautioned that the stronger data did not change the overall outlook for Britain’s growth, nor will it provide relief to households grappling with high inflation and rising borrowing costs.

“UK growth has still been very sluggish, even if it’s not at the bottom,” said Prof. Huw Dixon, who leads research in economic measurement at the National Institute of Economic and Social Research.

The revised data “doesn’t change the real economy one bit,” Dixon told CNN. “If you’re an ordinary firm or household, this has no effect on you. It simply tells you the measurement was wrong, and GDP is slightly higher than we thought it was.”

John Springford, deputy director at the Centre for European Reform, a think tank, added: “The revisions are good news. But since 2021 the economy has stagnated — and that followed a period of below-trend growth after the [2016] Brexit referendum. So while the size of the economy is bigger than we thought, Britain still has a growth problem.”

Richer data

In 2020, the UK economy suffered its biggest slump in more than three centuries, recovering sharply the following year off a low base.

The ONS said Friday that GDP was now estimated to have fallen by 10.4% in 2020, instead of 11%, as previously judged. That’s still the sharpest annual contraction since the Great Frost of 1709. Annual GDP growth for 2021 was also revised up by 1.1 percentage points to 8.7%.

ONS director of economic statistics Darren Morgan said the statistical revisions came down to some richer data, which takes longer to collect.

“If you look at 2020, our more comprehensive surveys show businesses were adding to unsold stocks, rather than running them down,” he told CNN.

For 2021, more up-to-date business surveys showed that profit margins in retail and wholesale trade held up much better than estimated earlier, and the public and private health sectors also performed better.

The costs incurred by businesses to produce their goods were likewise adjusted, resulting in a positive impact on the services sector — which accounts for the bulk of GDP — but a negative impact on manufacturing.

UK finance minister Jeremy Hunt said the country’s quicker recovery from the pandemic “shows that once again those determined to talk down the British economy have been proved wrong.”

But Gregory, of Capital Economics, said that although the data “suggests the economy has been much stronger than we previously thought,” it doesn’t materially improve the bigger picture.

“With the UK still likely to be suffering from a labor supply shortfall, this is no guarantee of future long-term resilience.”

The latest GDP revisions could simply bolster the case for keeping interest rates higher for longer, she added. The data “underlines the need for the Bank of England to keep on top of demand to tame inflation.”

Economists at Nomura said the revisions could even increase the risk of a recession going forward “as there’s less catch-up to be had.”

The United Kingdom is one of the first countries in the world to revise its GDP estimates for the pandemic period using a more detailed framework, which means other countries could also change their estimates at a later date.

“It is important this is considered when comparing the UK with other countries, and our international comparison position is likely to change once other countries fully confront their datasets over time,” the ONS said.

The-CNN-Wire
™ & © 2023 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.