- Quarterly GDP growth came in at 0.8% in Q1, but is likely to represent the high point for the UK this year. The cost of living squeeze will increasingly weigh on consumer demand, and in Q2 activity will face further challenges in the form of an extra bank holiday and loss of support to health output from the end of free COVID-19 testing.
- Q3 will have a full quota of working days, so output should rebound. But growth over the rest of this year will depend crucially on consumers being willing to save less and borrow more in the face of falling real incomes – an uncertain prospect given the troubles facing the economy.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“GDP fell by 0.1% month-on-month (m/m) in March, largely due to a significant fall in activity in consumer-facing services. A poor March for new car sales was the main factor, though the fall in retail sales was also important. On the flip side, though another significant fall in COVID-19 testing and vaccinations weighed on health activity, the health sector still saw strong output growth (+1.5% m/m) due to a large rise in GP appointments.
“March’s modest decline, plus a downward revision to February, meant that GDP rose 0.8% quarter-on-quarter (q/q) in Q1. The expenditure breakdown showed a 0.6% rise in consumer spending, a little underwhelming given spending in Q4 2021 had been dampened by the emergence of Omicron. With the cost of living squeeze continuing to intensify, consumer spending faces a major headwind, although scope for households to draw on the 8% of GDP of ‘excess’ savings accumulated during the pandemic and to borrow more may mitigate this.
“The economy faces two more hurdles in Q2 – the extra bank holiday for the Queen’s Platinum Jubilee and the likelihood of a fall in health output following the end of free COVID-19 testing. The EY ITEM Club expects these factors to cause near-stagnation in GDP in Q2, although with Q3 having a full quota of working days, output should quickly rebound.
“While the EY ITEM Club thinks a recession this year is unlikely, growth will struggle. With the consumers feeling the pinch and the Government tightening its purse strings, the onus is on companies to step up and invest more before the super deduction ends next year. But with business investment having fallen again in Q1 2022, the year has got off to a disappointing start in that respect.”