GDP saw a better end to 2022 – EY ITEM Club comments

• Q4 2022's national accounts delivered another upside surprise for the economy, showing GDP grew 0.1% quarter-on-quarter, up from zero in the ONS’ preliminary estimate. There was also an increase in real household income, the first in five quarters, aided by energy bill support from the Government.
• The adverse effect of still-high inflation and rising interest rates, plus the extra public holiday in May, mean the EY ITEM Club thinks the economy will eke out only marginal growth over the first half of this year. However, lower household energy bills, falling inflation and the Budget's fiscal loosening point to a brighter outlook in the second half of the year.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “There's little meaningful difference between an economy that is stagnating and one that is growing slightly. The revelation from Q4 2022's national accounts that the economy grew 0.1% quarter-on-quarter, rather than flatlining as in the preliminary estimate, therefore doesn't carry much significance. That said, alongside Q3's contraction in GDP being revised smaller, it represents the latest in a run of upside surprises and suggests the economy has displayed a welcome degree of resilience, despite pressure from high inflation and expensive energy.

“The income breakdown delivered more good news, showing the first rise in real household incomes in five quarters. However, a 1.3% quarter-on-quarter increase was driven by Government support to households with energy bills, rather than better fundamentals, so could prove short-lived. The boost to incomes, alongside a more modest (if upwardly revised) 0.2% increase in consumer spending, pushed the household saving ratio up to 9.3% from 8.9% in the previous quarter. Meanwhile, the current account deficit narrowed to 3.3% of GDP in Q4 from 4.2% of GDP in Q3, reflecting a recovery in overseas income.

“The EY ITEM Club thinks the economy will see only very modest growth over the first half of this year, but no recession. Recent economic data has delivered mostly positive surprises, but growth in Q1 faced headwinds from a poor starting point, continued industrial action in some sectors, still-high inflation and rising interest rates. While some of these adverse forces are now easing, May's extra bank holiday could exert a drag on output in several sectors, holding back expansion in Q2. However, prospects should brighten in the second half of 2023, as energy bills start to fall, inflation decreases at pace, and the Budget's fiscal loosening takes effect.”