The UK economy: Poor health
by:Andrew Cates
|in:Economy in Brief
The UK economy is not in great shape. That’s the overriding message from the battery of UK economic data that have been published over the past few days.
Although last week’s data revealed that GDP grew by a stronger-than-expected pace of 0.5% in June, the UK’s post-pandemic recovery has nevertheless remained poor. The level of GDP in Q2 2023, for example, was still some 0.2 percentage points below the level in Q4 2019, just prior to the onset of the pandemic.
Figure 1: UK output is still below pre-pandemic levels
Ordinarily a weak recovery would give way to a bout of stronger economic momentum as excess capacity is re-absorbed. UK forecasters, however, have been marking down their expectations for GDP growth in 2024 according to the latest Blue Chip Survey of economic forecasters. Those downward revisions, moreover, appear relatively acute compared with elsewhere.
Figure 2: Downgrades to the UK outlook for 2024 have been acute
One reason for this relative pessimism concerns inflation. Today’s UK CPI data revealed that core inflation remained uncomfortably high in July, largely thanks to firming price pressures in the service sector. Again, this stands in vivid contrast to the direction and level of core inflation rates in other major economies.
Figure 3: Core CPI inflation in the UK remains uncomfortably high
That news on the UK inflation front came hot off the heels of yesterday’s data revealing strengthening nominal wage pressures and slowing labour market activity. That combination though also offers strong hints of labour market dysfunction. And that was indeed the message from the news about labour market inactivity. This remained high, for example, in large part because long-term sickness numbers rose to a record high.
Figure 4: Still-high UK labour market inactivity
Overall the latest UK data add to the case for another interest rate hike from the Bank of England in the coming months. It seems equally clear, however, that the UK economy’s problems are not necessarily rooted in an overtly loose monetary policy.
Andrew Cates
AuthorMore in Author Profile »Andy Cates joined Haver Analytics as a Senior Economist in 2020. Andy has more than 25 years of experience forecasting the global economic outlook and in assessing the implications for policy settings and financial markets. He has held various senior positions in London in a number of Investment Banks including as Head of Developed Markets Economics at Nomura and as Chief Eurozone Economist at RBS. These followed a spell of 21 years as Senior International Economist at UBS, 5 of which were spent in Singapore. Prior to his time in financial services Andy was a UK economist at HM Treasury in London holding positions in the domestic forecasting and macroeconomic modelling units. He has a BA in Economics from the University of York and an MSc in Economics and Econometrics from the University of Southampton.
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