UK GDP grows strongly in first quarter of 2024

After two quarters of mild negative growth of -0.3% in 2023 Q4 and -0.1% in 2023 Q3, the UK grew strongly by 0.6% in 2024 Q1, reports the Office for National Statistics (ONS). Year-on-year growth was a more modest 0.2%, and over the last two years growth has been 0.5% (Figure 1). The Bank of England, in this month’s Monetary Policy Report, forecasts continued weak growth, with growth of ½% this year, 1% in 2025 and 1¼% in 2026, 0.25 percentage points higher in each year than in its February forecast. This compares with average growth of 2% a year over the period 2010-19.

Figure 1:

The services sector, a particularly important sector for London’s economy, grew by 0.7% in 2024 Q1 with widespread growth across the sector. Professional services increased by 1.3%, and consumer-facing services grew by 0.6%. Hospitality, on the other hand, fell by 0.2%. The Production sector grew by 0.8%, and within it Manufacturing increasing by 1.4%, while Construction fell by 0.9%.

Inflation fell markedly in April

Consumer Prices Index (CPI) inflation rose by 2.3% in the twelve months to April 2024, down from 3.2% in the twelve months to March. Falling gas and electricity prices resulted in the largest downward contributions, while the largest, partially offsetting, upward contribution came from motor fuels – whose prices have risen this year, but were falling a year ago. Core CPI (excluding volatile energy, food, alcohol and tobacco prices) rose by 3.9% over the year to April 2024, down from 4.2% in March. The CPI goods annual rate slowed from plus 0.8% to negative 0.8%, the first negative rate since February 2021. While the CPI services annual rate was nearly unchanged easing from 6.0% in March to 5.9% in April (Figure 2).

Figure 2:

The Bank this month forecast CPI inflation to be 2½% this year, 2¼% next year, and 1½% in 2026, a slight easing from the February forecast. It expects CPI inflation to return close to the 2% target in the near term, but to increase slightly in the second half of the year owing to the unwinding of energy-related base effects (in part, the removal of consumer subsidies). This will reveal the persistence of domestic inflationary pressures (as reflected in high services inflation). The Bank expects second-round effects in domestic prices and wages to take longer to unwind than they did to emerge. As a consequence, the Monetary Policy Committee left interest rates unchanged at 5.25% this month, by a vote of 7-2.

London came out of the pandemic more slowly than previously reported

This month the ONS has published figures on London’s output for 2022, and revised figures for earlier years. This is to make them consistent with UK figures, which were revised upwards last year, and to incorporate other methodological changes. The net effect of these changes is to reduce estimates of London’s output compared with what GLA Economics was previously reporting.

The ONS reports that London’s economy fell more during than the pandemic than the UK, and has recovered marginally more quickly. London’s output fell by 12.6% in 2020, and recovered by 8.2% in 2021, and 4.8% in 2022. The corresponding figures for the UK are -10.0%, 8.4%, and 4.1% respectively.  London had not recovered to its pre-pandemic level of output in 2022, while the UK exceeded its previous level in that year. London’s Gross Value Added (GVA) in 2022 was £470 billion, compared with £474 billion in 2019 (Figure 3).

Figure 3:

The ONS has commented that some parts of London have recovered quickly from the pandemic, while others have been worse affected, including the areas around Heathrow airport and many outer London boroughs. The impact on transport hubs, especially rail and air transport, has been extensive and deep.

This reverses our previous advice, based on ONS statistics, that London was recovering more strongly from the pandemic. This, in turn, incorporated ONS data revisions, and reversed the original advice that London suffered disproportionately during the pandemic.

Net migration to the UK falls in 2023

There is tentative evidence that UK net migration figures are slowing. Total net migration is provisionally estimated to have fallen to 685,000 in the year to December 2023 from 724,000 in the year to December 2022. Net migration was at a low of 35,000 in the year to September 2020 after the first effects of the pandemic, and just before the post-Brexit immigration regime took effect (Figure 4).

Figure 4:

The main contributors to the decline were:

• lower immigration on humanitarian visas (i.e. for citizens of Ukraine and Hong Kong), down 108,000 since 2022
• fewer non-EU students: non-EU student migration fell 40,000 and emigration rose 42,000, reducing net migration by 82,000. Emigration is likely to rise further as the rising number of students from a few years ago return home

There were some partial offsets from increases elsewhere:

• Non-EU work visa immigration rose 146,000 in 2023, driven by large numbers of workers arriving for health and care jobs. This looks set to change as health and care visa grants had collapsed by early 2024
• Fewer EU citizens emigrated, down 37,000 since 2022, although net migration is still negative at 76,000.

The Director of the Migration Observatory commented, “student emigration hasn’t increased as much as expected, because more students have been staying on to work. However, early data suggest we may see a bigger decline later in 2024”. Worryingly, declining visa numbers will have adverse effects for university finances, health and care sectors recruitment, and reduce government revenues, and economic growth.

Post-Brexit border controls continue to be introduced

On 30 April the Government began the process of introducing border controls on plant and food products from the EU, after postponing implementation five times. Just over a fortnight before physical inspections were set to begin it became clear that critical health and safety checks for EU imports would not be ready. Lorries have had to drive 22 miles from Dover to border control posts on the outskirts of Ashford. Anyone found to be carrying unsafe or contaminated food could be asked to turn around and drive back again – although it is not clear how it would be verified that the foods were returned overseas. Dover Port Health Authority have raised the alarm that commercial volumes of illegal meat have been making their way to the UK through non-trade routes on cars, vans and coaches. The National Audit Office has found that a government programme to build a post-Brexit trade border has been hit by delays that will push up costs to at least £4.7 billion.

In a separate development, Ireland has a €700 million (£600 million) tax windfall from customs duties, collected in 2020 and 2021, now applicable post-Brexit to imports of clothing, food and other goods from Britain. It appears that some of these additional revenues came from non-EU goods held in Britain for distribution in the UK and Ireland. These might be clothes made in India, Bangladesh or Morocco, and sold in high street stores such as Penneys in Ireland, owned by Primark. Despite these tax receipts the Irish economy is likely to be worse off from Brexit and the introduction of trade barriers. The introduction of duties will need to be met through higher prices for consumer, or lower profits for importers and exporters, or all three.

The world economy continues to be resilient despite geopolitical risks

A global economic recovery is unfolding, according to the latest Organisation for Economic Cooperation and Development (OECD) Economic Outlook, despite the geopolitical risks. Inflation is easing faster than expected, labour markets remain strong with unemployment at or near record lows. A sharp rebound is expected in global flows of products, but growth is uneven. The United States and a number of large emerging markets continue to exhibit strong growth, in contrast to European economies. The mixed macroeconomic landscape is expected to persist, with inflation and interest rates declining at differing paces, and differing needs for fiscal consolidation to recoup expenditure during the pandemic.

Global GDP growth is projected to be 3.1% in 2024, unchanged from 2023, before edging up to 3.2% in 2025 helped by stronger real income growth and lower policy interest rates. The UK is on course for “sluggish” growth that will lag its G7 peers, except Germany, and high inflation. UK GDP is expected by the OECD to increase by 0.4% in 2024, before rising to 1.0% in 2025. Inflation will run at 2.7% this year, before receding to 2.3% in 2025, the highest pace amongst the G7 for both years.

International tourism to London slips back a little in the final quarter of 2023

Overseas tourism levels to London have been volatile over 2023 compared with the corresponding quarter in 2019. Visitor nights in 2023 Q3 were 28% higher than for 2019 Q3, and for Q4 were 5% lower than 2019 Q4 (measured on this basis to account for the seasonal variation in tourism). There were also dips in visitor numbers, and spend, adjusted for inflation, in 2023 Q4. Spend remains 18% below its level in 2019 Q4, Figure 5.

Figure 5:

The drop reflects a substantial decrease in visitors from North America, partially offset for by a rise in visitors from Europe. Both are close to their level in 2019 Q4. Overseas visitors are still mainly coming to visit friends and family, or on holiday, but business travel remains subdued compared with previous activity.

GLA Economics will continue to monitor London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.