First, the good news (and the news is mainly good today).
The unexpectedly large 0.6% bounce in GDP in the first quarter of the year means that the UK economy has officially exited ‘recession’, after declines of 0.1% in Q3 and 0.3% in Q4 2023. This has already led to some more positive headlines, which should boost consumer and business confidence, and will prompt a wave of upward revisions to forecasts for 2024.
Indeed, the UK economy is now on course to grow by a minimum of 1% this year, at least double the latest projections from the OECD, IMF and BoE (all between 0.4% and 0.5%). My own best guess for 2024 is now 1.2%. This makes a mockery of those recent headlines about the UK facing the lowest projected growth in the G7, which were based on tiny differences in forecasts that we know will almost certainly be wrong!
To be fair to the officials, the consensus for 2024 in the latest Treasury poll of independent forecasters was just 0.4% too. Fair play also to the team at the OBR, who get a lot of (mostly unjustified) stick but who have been ahead of the pack here; the March EFO predicted growth of 0.8% in 2024 as interest rates fall and real household incomes recover.
There should always be some caveats, too. The first quarter GDP data were flattered by two factors. One was simply the favourable comparison with the weak figures in the second half of last year. The upshot is that the economy was just 0.2% bigger in Q1 2024 than in Q2 2023, so a strong figure for 2024 would still be coming off a low base.
The second caveat is that there was a big boost from net trade in Q1, which accounted for around two-thirds of the quarterly growth. That may sound like a good thing, but it simply reflects the fact that the volume of imports (down 2.3%) fell even more than exports (down 1.0%). In contrast to the headline GDP growth of 0.6%, consumer spending rose by only 0.2%.
GDP per capita did increase on the quarter, by 0.4%, after a long run of flat or negative numbers. But Labour’s Rachel Reeves was quick to point out that the economy was still ‘£300 per person smaller’ in Q1 2024 than when Rishi Sunak became PM in Q4 2022 (which is broadly correct, based on the ONS data here).
However, there are some positives to take away as well. On the expenditure side, business investment increased by another 0.9% in Q1, building on the growth of 1.4% in Q4 2023. Higher investment is obviously important to boost potential supply, productivity, and real wages.
On the output side, the Q1 figures would have been stronger had it not been for a second successive 0.9% fall in construction, which was partly due to the unusually wet weather. The more timely PMI and RICS surveys both point to a bounce back here in Q2.
Above all, growth should continue at a decent pace over the rest of the year. The business surveys that signalled a rebound in the first quarter were still strong at the start of the second. Inflation is set to fall to (or below) the 2% target in the April data and to remain low.
Some have suggested that the stronger GDP numbers might deter the MPC from cutting interest rates as quickly, but the Bank has made clear that the timing will depend on the incoming data on inflation and the labour market instead. (I wrote more on the Bank of England yesterday.)
The combination of better news on inflation, rising real incomes and lower interest rates should therefore have a bigger impact on sentiment than more nerdy points about ‘GDP per head’, regardless of how valid these points may be.
Taking my usual ‘glass half full’ view, the UK economy has indeed ‘turned the corner’. There is still a long way to go before it could be said to have fully recovered from the recent shocks, but it is at least now heading in the right direction.
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Plain-speaking Economics 