- Q2’s national accounts revised up the gain in GDP following the relaxation of COVID-19 restrictions. Improvements to the measurement of output revealed a slightly different picture of the economy’s performance over the last 20 years.
- The adverse effect of rising prices and supply problems on spending power and sentiment mean the recovery is looking more fragile. But the fuel for further growth, including strong household balance sheets, is not exhausted.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“Q2’s national accounts revised up quarterly GDP growth to 5.5% quarter-on-quarter from 4.8%. Health output rose more than initially thought, which accounted for much of the gain. The effect of the economy’s reopening was also clear in a decline in the household saving ratio from 18.4% in Q1 to 11.7%. But this remained above the 2000-2019 average of 8.5%.
“Meanwhile, improvements in measuring GDP resulted in average annual growth in the decade prior to the financial crisis revised down from 2.9% to 2.7%. But average growth for 2010-2019 was upgraded from 1.8% to 2.0%. So the productivity puzzle has become less puzzling.
“Turning from history to the near-future, headwinds to growth from supply disruption, the negative effects on household spending power, sentiment from rising inflation and energy prices mean the recovery is looking more fragile. But talk of “stagflation” is overdone. With job vacancies at record levels, the EY ITEM Club continues to think the end of the furlough scheme (which closes today) will prompt only a modest rise in unemployment. Credit conditions remain loose and household balance sheets are strong, with excess savings accumulated during the pandemic exceeding £200bn in Q2. And while next April’s rise in personal tax will weigh on consumer spending, this will be offset by the boost to GDP from higher government spending.
“So while the EY ITEM Club is likely to pare back its view on near-term growth in its next quarterly forecast, the recovery is a long way from running out of support.”