A Closer Look at the UK's Recent GDP Growth

A closer look at recent GDP Growth

The latest data from the Office for National Statistics (ONS) has confirmed that in February, the UK’s GDP grew by 0.1%. Although this is a minimal increase, it is good news since the UK ended 2023 in a recession. The increase in GDP stemmed from advancements in production and manufacturing, coming predominantly from the automotive industry. 

How the UK's GDP has changed (source: BBC)

A Glimmer of Hope in Challenging Times

This slight increase in February is pivotal as the UK economy has been struggling the last couple of months. For the first time since last summer, there has been overall growth in GDP over 3 months, hopefully meaning the UK’s recessionary troubles are nearing an end. Liz McKeown, the Director of Economic Statistics at the ONS said: “The economy grew slightly in February with widespread growth across manufacturing, particularly in the car sector. Services also grew a little, with public transport haulage and telecommunications having strong months.  The UK’s growth in manufacturing is a promising sign - especially bearing in mind that car production has risen by 17.8% compared to February 2023, highlighting the advancements in manufacturing.            

Persistent Challenges in Construction and Services

Despite the positive signs coming from the manufacturing sector, the construction sector faced challenges due to adverse weather conditions which resulted in output falling by 1.9% in February. February 2024 was one of the wettest Februarys on record, with figures showing it currently ranks in the top five for rainfall with 106.8mm of rainfall falling. This level of rainfall meant several building projects had to be cancelled or delayed thus reducing output and constraining economic growth. 

The services sector, which accounts for almost 80% of the UK economy, saw a slight growth of 0.1%. The decline in the services sector has primarily been caused due to the coronavirus pandemic and the increased cost of living which has added to these challenges and accelerated trends such as increased online shopping and closures of retail premises. This reflects the ongoing challenges in retail and wholesale distribution, which was further affected by the weather - as high levels of rainfall caused consumers to shop online instead of in-store. 

Main reasosn for growth in the construction industry (Source: Global Market Insights)

Responses from Politicians

The slight improvement in GDP has caused mixed responses from politicians. Chancellor Jeremy Hunt claimed that the February GDP figures indicate the economy might be “turning a corner”, and stated that this was due to the government’s economic policies. On the other hand, Shadow Chancellor Rachel Reeves criticised the Conservative government and claimed that they are the reason for the low growth due to the high levels of tax, which she states have worsened the economic challenges. Economists are cautiously optimistic - suggesting that if the economy grows in March, the UK might not have to worry about recession in the first quarter of 2024. 

Implications for Households and Businesses

Although the economy has grown, it remains discouraging for UK households and businesses. This is mainly due to high interest rates and an increase in prices which continue to strain households and businesses in the economy. However, similarly to the Fed, the Bank of England are potentially expecting to lower interest rates over the summer/autumn of 2024, which may result in the economy being less daunting and thus better for consumers and businesses alike. 

However, at the moment consumer spending remains low and business investments are restricted due to political uncertainty - especially with the upcoming general election. This was further emphasised as Yael Selfin, Chief Economist at KPMG, acknowledged the presence of positive signs (lower potential interest rates in the future), but noted that people still should remain cautious about their confidence and investment decisions.

Economic Outlook and Policy Directions

Looking forward, the UK’s economy is expected to make a gradual recovery. Although the boost in manufacturing in February led to slight growth, it points to an overall growth rate that remains slow - that is compared to the rest of the countries in the G7. The figures for March will hold great significance for the economy, especially taking the political factors into account.

The upcoming general election is the most significant political event that will affect the economy significantly - regardless of which party wins, economic recovery is likely to be a central issue. The government will need to use policies that support sustained economic growth, without increasing inflationary pressures. The British Chambers of Commerce (BCC) Quarterly Economic Forecast slightly upgraded growth expectations for 2024 and 2025, as the recession only lasted just two quarters, but strong growth will remain elusive. The UK economy is expected to grow every year until the end of 2026 but will continue to lack momentum, hopefully with a good fiscal policy from the government, the UK economy will grow with strong momentum. 

The Broader Economic Environment

Through international conflicts and disruptions in global supply chains, the global economic environment continues to influence the UK’s economy. International conflicts, in particular the Ukraine-Russia war and the Israel-Hamas war, have played a huge part in the UK’s economy. The Ukraine-Russia conflict impacted the UK in a few key ways - specifically energy prices. The UK cutting ties with Russia meant that the UK had to pay more money to source energy - in particular oil and gas. As a result, this put upward pressure on inflation and also resulted in a decrease in purchasing power for households and businesses. One of the many disruptions in global supply chains that affected the UK’s economy was food. Both Ukraine and Russia are major exporters of wheat, corn, and other agricultural products. The war disrupts production and exports, leading to shortages and price increases for food items in the UK. The impact of these global events highlights the interconnected nature of modern economies. 

Also, the main cause of the cost of living crisis is a surge in global energy prices due to the war in Ukraine. This has caused the cost of heating and transport to increase - heating in particular cost an average of £1,277 a year ago, compared to £1,834 today highlighting the increase in energy costs. This would potentially be higher if the energy price cap, introduced by market regulator Ofgem, wasn’t introduced. Disruptions in global supply chains and international conflicts are likely to continue impacting economies worldwide.

Conclusion

To conclude, while there are signs of potential economic recovery in the UK, there are also many obstacles in the way - such as global supply chain disruptions and a struggling retail sector. The coming months will be crucial in determining whether the low growth in February can turn into a stable pattern of recovery, or if the UK is set for more economic turbulence. Another important factor will be the economic policies adopted by the next government - these will be key to ensuring a stable economy.

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