- The national accounts for Q3 showed a slightly bigger 0.3% quarter-on-quarter fall in GDP than initially estimated. The economy's performance in Q3 wasn't helped by another fall in household incomes and an unexpected rise in the household saving ratio. GDP growth was also revised lower in each quarter back to Q3 2021.
- Scope for a fall in the saving ratio, alongside households' sizeable cash holdings, will likely offer some support to activity in the near-term. However, the scale of headwinds facing the economy means the EY ITEM Club expects another fall in GDP in Q4, and for recession to persist through the first half of 2023.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Q3's national accounts presented a gloomier picture for GDP than the ONS' preliminary estimate. The economy is now thought to have shrunk 0.3% quarter-on-quarter, revised bigger from 0.2%, and there were downward revisions to the change in GDP in each quarter from Q3 2021. As a result, the economy is now estimated to have been 0.8% below its pre-Covid size in Q3, revised from 0.4%.
“The economy's weakness in Q3 reflected a 0.5% fall in real household incomes – the fourth consecutive quarterly decline. However, an unexpected headwind came from a surprise rise in the household saving ratio, which increased to 9% from 6.7% in Q2, breaking the downward trend from a pandemic-related peak of 20.1% at the start of 2021. Granted, much of the rise reflected a change in pension entitlements related to the rise in gilt yields over the autumn. But the non-pension saving ratio also ticked up. Meanwhile, Q3's current account deficit of 3.1% of GDP was substantially narrower than Q2's 7.1%, although movements in non-monetary gold made a large contribution to the smaller shortfall.
“Q3's fall in GDP is unlikely to prove a one-off. Retail weakness, a poor set of PMIs and disruption from industrial action all point to the economy likely contracting again in Q4. And the EY ITEM Club expects a recession to persist over the first half of 2023, as high inflation affects household spending power and tighter monetary and fiscal policy weigh on activity. That said, the economy is not out of supports. Households have room to save a smaller share of incomes, and on some measures, they have yet to dip into the £200bn+ of excess savings accumulated during the Covid pandemic. Consumer spending is therefore unlikely to fall to the same extent as real incomes. And falling inflation over the course of next year offers hope of a return to growth later in 2023.