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London’s Economy Today editorial – August 2023

UK economy grew in the second quarter

Data published by the Office for National Statistics (ONS) showed that the UK economy grew marginally in the second quarter of 2023. Output increased by 0.2% between April and June 2023 after increasing by 0.1% in the previous quarter. However, despite this subdued growth UK GDP remains 0.2% below its pre-pandemic level in Q4 2019 (Figure 1).

Figure 1:

All major sectors of the economy grew in Q2 2023 with Services increasing by 0.1%, Production by 0.7% and Construction by 0.3%. Looking at monthly GDP growth rates, ONS data showed the economy grew by 0.5% in June after falling by 0.1% in May and growing by 0.2% in April 2023.

However, looking forward, the Bank of England (BoE), in their August Monetary Policy Report, expects that quarterly output growth will stay around 0.2% in the near term. They then expect growth to weaken due to the impact of higher interest rates.

Further, looking at the third quarter of the year some indicators suggest that it got off to a poor start. This can be seen from retail sales in July which fell in volume by 1.2% compared to June according to ONS data. Food stores saw sales volumes fall by 2.6% in July while non-food stores saw sales volumes fall by 1.7%. Still, it is possible that one-off factors at least in part affected sales during the month with the ONS observing that “some of the fall was because of the poor weather reducing summer clothing sales. However, food sales in supermarkets also fell back”.

Inflation falls to its lowest level since February 2022

UK inflation fell back in July 2023 according to ONS data. Annual Consumer Price Index (CPI) inflation in the UK stood at 6.8% in July down from 7.9% in June (Figure 2). The ONS noted that “on a monthly basis, CPI fell by 0.4% in July 2023, compared with a rise of 0.6% in July 2022” with falls in gas and electricity prices providing the lowest downward contributions. However, hotels and passenger transport by air provided the largest offsetting upward contributions to inflation. Despite inflation falling, core inflation which takes out energy, food and alcohol and tobacco prices remained unchanged at 6.9% in July. Meanwhile, service inflation, which is often seen as the best indicator of underlying inflation, rose in July. It increased to 7.4% in July 2023 up from 7.2% in June, this was the joint highest rate since March 1992.

Figure 2:

ONS data also showed that UK private rental costs increased at the highest rate since the data series began in January 2016. They increased by 5.3% in the year to July 2023. In London the increase was even higher at 5.5%, which was the highest rate since the London series began in January 2006.

Despite inflation dropping back a bit the impact of the cost of living crisis on households continues to be felt. Thus, the consumer group Which? conducted a survey in July that estimated that 2.4 million UK households missed at least one bill payment in the month to mid-July. While 770,000 households were estimated to have failed to make a mortgage or rent payment. This amounts to one in twenty UK renters and one in thirty UK mortgage holders defaulting on a payment.

Still looking forward there is some positive news in that energy bills are set to fall. It was announced in August that the Ofgem energy price cap would drop in October. This fall will mean that the typical annual household energy bill would be £1,923 with this new cap. This is £151 lower than currently and £577 lower than seen last winter (when the Energy Bill Support Scheme was running).

Bank of England raises interest rates again

The BoE raised interest rates again in August. They increased them by 0.25 percentage points to 5.25% the 14th increase in a row and a 15-year high. Commentating on the prospects for the rate the Governor of the Bank of England, Andrew Bailey, said that there would have to be “solid evidence” that inflation was slowing. The BoE in their Monetary Policy Report observed that rates would be “sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term”. Looking forward they expect inflation to fall to around 5% by the end of the year with it to reach 2% by early 2025.

Rising interest rates appear to be having a depressing effect on house prices according to some mortgage lenders. For instance, the Nationwide reported that UK house prices dropped at the fastest rate in 14 years. They reported that prices fell 0.2% on the previous month in July, and by 3.8% compared with July 2022 which was the largest fall they had recorded since July 2009. The lender also reported that the number of house sales they saw in July were 15% lower than a year earlier. It should however be noted that ONS data still shows rising if slowing house prices at the national level.

China falls into deflation while the Eurozone returns to growth

In signs that China’s economy is slowing consumer prices in China fell at an annual rate of 0.3% in July after showing no change in June. This is the first time prices have fallen in China since February 2021 and comes as the country faces a number of challenges. Exports fell by 14.5% in July compared to a year earlier while imports dropped by 12.4% as the global economy slows. Chinese property firms have also been facing issues with the property developer Evergrande filing for bankruptcy protection in the US. The company has around $19bn in dollar denominated debt which it has been attempting to restructure after defaulting on it in late 2021. Last month it announced losses of $81bn over 2021 and 2022. Other property developers in China have also issued loss warnings with for example the firm Country Garden warning of a loss of $7.6bn for the first 6 months of 2023. In response to concerns about the economy the People’s Bank of China cut interest rates from 2.65% to 2.5% in August; this follows a similar sized cut in June.

Closer to home the Eurozone returned to growth in Q2 2023. Data from Eurostat showed that the Zone’s economy increased by 0.3% in the second quarter following on from zero growth in Q1 2023 and a contraction of 0.1% in Q4 2022. The European Central Bank however increased interest rates again at the end of July to 3.75% up from 3.5% previously. This rate has not been seen in the Zone since late 2000.

London’s exports recover after pandemic

The latest ONS sub-national trade statistics confirm that London ‘s exports have done comparatively well in 2021 after the pandemic, and the loss of access to the EU Single Market in the same year. As well as London only the East of England and the North West had recovered to their 2019 level of exports, before inflation (Figure 3). It is likely that London’s export performance has contributed to the strong recovery of its economy post-pandemic.

Figure 3:

Trade balances for most UK countries and regions improved between 2019 and 2021 because imports fell by more than exports. Other GLA Economics analysis indicates that trade in goods has been impacted more by leaving the EU than trade in services in which London specialises. UK services exports have been able to orientate away from the EU, and it is likely that London has been prominent because of its disproportionate contribution. London’s trade surplus had recovered sufficiently that by 2021 it was £51.6 billion, and more than covered the UK deficit of £28.1 billion – this is the first time since the series began in 2016 that this had happened.

Meanwhile, the Government continues to postpone proposed post-Brexit changes. Ministers confirmed a fifth delay to the implementation of post-Brexit border controls on food and fresh products from the EU. The new regime was meant to start in 2021, and the latest delay pushes this back to the end of January 2024. There are fears that new red tape will push up food prices during an inflationary crisis, while traders would like more time to prepare for a new system. The Government has also retreated on a post-Brexit rival to the EU’s product quality mark in all sectors except construction products and medical devices. Business leaders had warned ministers that it was tying manufacturers up in red tape.

IFS examines regional funding of services

The Institute for Fiscal Studies (IFS) published research in August examining how much was spent on five key public services in 2022-23 in England. These services were the NHS, schools, local government, the police and public health. In the research the IFS found that the average cost of funding these services in England was £4,310 per capita. However this varied quite widely with it ranging from an “estimated £3,642 in York, to £5,648 in Blackpool (55% more)”. Although they did note that “funding per capita was highest in inner London boroughs and relatively deprived, urban areas in the North”.

Still they also observed that “relative funding levels are particularly sensitive to choices around which set of population estimates to use”. So depending on the population estimate used Camden moves from the least-funded third of places to the second highest funded per capita in England. They also found that in relation to needed local government funding there was a wide discrepancy. Thus “Wokingham received a share of local government funding that was 45% higher than its share of estimated needs, while Hounslow received 31% less. These large differences only partly reflect local choices around revenue-raising, and are largely due to the government prioritising other objectives in the local government funding system”. However, in terms of NHS funding needs they found that the share of funding in London was typically above the estimated needs.

GLA Economics will continue to monitor these and other aspects of 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.