Britain avoids a recession – for now

The UK's economy grew by 0.8 per cent between January and March this year, according to this morning’s update from the Office for National Statistics. This means real GDP is now just 0.7 per cent above its pre-pandemic levels. On the face of it, it's fairly grim news. The spectacular growth originally forecast for this year, making up for lost time in lockdown, did not transpire in the first three months of the year. Signs of a weak economy are starting to show. While consumer spending was up by 0.6 per cent in the first quarter, business investment fell by the same amount, down 9.2 per cent overall from its pre-pandemic levels.

Expectations were low for this data drop, and while it's clear that Britain's economy is stagnating, this is better than the alternative. Over the past month there has been increasing speculation that the UK had already fallen into a recession: the technical definition of which requires two consecutive quarters of negative growth. This morning’s update relieves recession fears, at least temporarily, as the economy in the first quarter did not shrink.

However, failing to meet the technical definition of a recession doesn’t mean that people aren’t feeling worse off. According to the ONS, real household disposable income fell by 0.2 per cent between January and March, as nominal income grew but was off-set by soaring inflation. This makes the opening of 2022 the ‘fourth consecutive quarter of real negative growth’ in people’s incomes. 

So while the economy is technically still growing, average purchasing power is shrinking and households are feeling the pinch. It’s a reminder that avoiding a recession doesn’t mean that Brits won’t still feel like they’re experiencing one, as they fail to experience the benefits of an (ever so slightly) larger economy.

While this morning’s update may provide some relief, economists are still preparing for a recession as early as this year. Inflation continues to take its toll. Bank of England Governor Andrew Bailey warned at a conference in Portugal yesterday that he expects a worse inflationary spiral in the UK than he does in other major economies. There is growing expectation that the economy will contract in the next few months (Capital Economics forecasts a 0.7 per cent fall in the second quarter), which will in part be influenced by the four-day bank holiday weekend for the Jubilee.

So this morning’s update is less comforting than the initial figure appears. The first three months of 2022 didn’t put the UK on a path to recession, but the economic post signs suggest tougher times ahead.