Flattened GDP Helps UK Economy To Skirt Recession

The UK economy managed to avoid a technical recession in the fourth quarter, but it is set to undergo a challenging period ahead as high interest rates and inflation squeeze disposable income of households.

Gross domestic product stabilized in the final quarter of 2022, as expected, after shrinking 0.2 percent in the third quarter, data released by the Office for National Statistics showed Friday.

The flat GDP helped the UK to avert a technical recession, which is defined as two consecutive quarters of negative growth.

However, partly due to strikes, GDP fell 0.5 percent in December, following a 0.1 percent rise in November. Economists had forecast a moderate 0.3 percent contraction.

In 2022, the UK economy grew 4.0 percent, which was much weaker than the 7.6 percent increase in 2021.

Last week, the Bank of England projected the economy to shrink 0.1 percent in the first quarter and to contract 0.5 percent in this whole year.

The International Monetary Fund had downgraded UK’s GDP outlook for 2023 by 0.9 percentage point to -0.6 percent, citing tighter fiscal and monetary policies and financial conditions.

In the fourth quarter, the service sector showed flat output driven by falls in the education, and transport and storage sub-sectors. At the same time, growth of 0.3 percent in construction was offset by a 0.2 percent fall in the production sector. The manufacturing sector was broadly flat.

In expenditure terms, growth in real household expenditure, government expenditure and gross fixed capital formation was offset by a fall in international trade flows in the fourth quarter.

Despite household incomes being squeezed by higher inflation, household expenditure edged up 0.1 percent after a 0.4 percent drop in the preceding quarter. Government consumption advanced 0.8 percent due to the increase in spending on public administration and defence and health.

There was a pickup in gross fixed capital formation, which increased by 1.5 percent. The 4.8 percent gain in business investment left it equal to its pre-coronavirus pandemic level.

The trade deficit for goods and services improved to 1.3 percent of nominal GDP in the fourth quarter.

In December, the main driver of the fall in GDP was services output, which was down 0.8 percent. After a 0.5 percent fall, the construction output was flat in December.

Underpinned by electricity, gas, steam and air conditioning supply, growth in industrial output improved to 0.3 percent from 0.1 percent. At the same time, the manufacturing growth remained unchanged.

Separate data from the ONS showed that the visible trade deficit narrowed to GBP 45.5 billion in the fourth quarter from GBP 49.5 billion in the third quarter. At the same time, trade in services decreased to GBP 37.2 billion from GBP 38.6 billion.

As a result, the total trade deficit narrowed to GBP 8.3 billion from GBP 10.9 billion in the previous month.

The increase in UK export values for the year is testament to the efforts of businesses and Chambers amid exceptional cost, energy and supply pressures, William Bain, head of trade policy at the British Chambers of Commerce, said.

“But we still have some way to go before we get back to where we were in 2018,” Bain added.

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