LONDON – Official figures released on Friday showed that the UK economy had a lackluster start to 2023 as inflation eroded households’ disposable income, according to Reuters.
The Office for National Statistics (ONS) confirmed its initial estimate of 0.1% quarterly GDP growth for the first three months of the year, leaving output 0.5% lower than the final quarter of 2019 before the COVID-19 pandemic.
The cost of living rose faster than income, leading households to dip into their savings. However, the overall savings ratio remained higher than pre-pandemic levels. The squeeze on households is expected to continue as the Bank of England raised interest rates to a 15-year high of 5% in June, and there is little indication that the tightening cycle will end, given persistently high inflation.
Economists, such as Ashley Webb from consultancy Capital Economics, believe that around 60% of the impact from higher interest rates is yet to be felt and expect the economy to enter a recession in the second half of the year.
Compared to other major advanced economies, the UK’s economic recovery since the pandemic has been slower. Germany has also struggled, with its economy in the first quarter of 2023 still 0.5% smaller than before the pandemic. By the end of the first quarter, the UK economy had grown just 0.2% in annual terms.
Rising inflation has put pressure on British households, particularly due to soaring natural gas prices after Russia’s invasion of Ukraine. Household real disposable income, adjusted for inflation and taxes, dropped by 0.8% compared to the previous quarter, the largest decline since Q2 2022. It was also 0.5% lower than a year earlier, reflecting higher costs for utilities and food.
The data also showed a decrease in savings as the cost of living increased. The savings ratio fell to 8.7% in the first quarter from 9.4% in the previous quarter, reaching its lowest level since Q2 2022 but remaining above the pre-pandemic average. Additionally, households made a net withdrawal of money from bank accounts for the first time since records began in 1987.
Mortgage repayments exceeded new borrowing by a record £5.2 billion ($6.6 billion), as people became more cautious about taking on new debt in a period of rising interest rates. House prices in June experienced the largest annual fall since 2009, declining by 3.5% compared to the previous year, according to data from Nationwide Building Society.
There was some positive news regarding business investment, which increased by 3.3% in the first quarter, the largest rise in a year. However, the ONS noted that this was driven by companies rushing to invest before the expiration of the “super-deduction” tax break on capital projects at the end of March. Businesses have frequently criticized the lack of long-term clarity in corporate tax policy, which has hindered sustained investment in the UK.
The underlying current account deficit of the UK narrowed to 2.6% of GDP in the first quarter compared to 3.3% in the previous quarter when excluding volatile flows of precious metals. However, the total current account deficit, including precious metal flows, amounted to £10.8 billion ($13.8 billion), higher than economists’ forecast and equivalent to 1.7% of GDP.
