UK economy appears to have avoided recession in 2022

First estimates from the Office for National Statistics (ONS) are that economic activity, or Gross Domestic Product (GDP), was flat in the final quarter of 2022. If this is confirmed by later estimates it would mean that the economy just avoided entering a technical recession of two successive quarters of decline after a fall of 0.3% in the third quarter. Despite this the broader picture is that the economy has flatlined at slightly below pre-pandemic levels of output through the whole of 2022 (Figure 1).

Figure 1:

More worryingly output is estimated to have fallen by 0.5% in December.  Output in the service sector as a whole fell by 0.8%, and by 1.2% in consumer facing services, reflecting reduced demand as the cost of living crisis increasingly takes hold.

Part of the decline in activity is due to the number of days lost to strikes.  The ONS estimates that this was 843,000 days in December across the UK. This is the highest figure since November 2011, when there were strikes for better public sector pensions.  The ONS reports that there was anecdotal evidence that rail strikes had negatively affected some businesses, particularly restaurants, caterers, hotels and bars.  Units involved in car hire and land transport reported a corresponding increase in turnover.  There was also anecdotal evidence that postal strikes had negatively affected some businesses, including in financial planning, hospitality, computer repair, and management consulting.  There were strikes as well by health workers, teachers, firefighters, civil servants, and other transport workers.

In its latest forecast, published in February, the Bank of England is expecting a shallow recession, and for output to fall by ½% in 2023, reflecting the effects of a rising tax burden and interest rates, falling wages after inflation, rising unemployment, and high energy prices.  This is a better outlook than in their November forecast reflecting an improved assessment for consumption in the light of the strength of the labour market, as well as a decline in wholesale energy prices – by mid-February European natural gas prices had fallen to an 18-month low.  In the medium-term, growth is expected to remain well below pre-pandemic rates.

The International Monetary Fund (IMF) in its latest forecast also expects the UK economy to shrink by 0.6% in 2023, the only economy in the G7 which it estimates to contract.  The UK is also the only economy in the G7 not to have returned to pre-pandemic levels of output.

The cost of living crisis deepens

In contrast, the National Institute for Social and Economic Research (NIESR) is forecasting GDP growth of 0.2% in 2023, but that income per head will fall by 0.1%.  The impact of higher prices is that 7 million UK households (1 in 4) may face energy and food bills that exceed their disposable income in 2023/24, up from around 1 in 5 in 2022/23.  Household disposable incomes have fallen sharply since the beginning of the pandemic, between 18% for the lowest quintile and 9% for the top quintile. 

Regional disparities are also widening.  London is projected by NIESR to be 9% above its pre-pandemic level of output by the end of 2024, while other regions are expected to fall further behind.  Despite this, polling by YouGov on behalf of the GLA finds that 17% of Londoners are ‘financially struggling’ and another 30% are ‘just about managing’.  The proportion ‘financially struggling’ is 5 percentage points higher than a year ago.

This month’s figures from the ONS indicate that inflation continues to moderate, and wages in money terms are still rising, but wages after inflation are contracting.  The Consumer Prices Index (CPI) rose by 10.1% in the 12 months to January 2023, down from 10.5% in December 2022, and its recent peak of 11.1% in October.  At the same time, growth in average total pay (including bonuses) was 5.9% and growth in regular pay (excluding bonuses) was 6.7% among employees in October to December 2022.  For regular pay this is the strongest growth rate seen outside the period of the pandemic.  Growth in total and regular pay adjusted for inflation for the same period fell by 3.1% for total pay, and 2.5% for regular pay.  This is smaller than during the financial crisis, although the period of adjustment is more prolonged, and it is among the largest falls in growth since comparable records began in 2001 (Figure 2).

Figure 2:

Pay increases have not been uniform across sectors.  Average regular pay growth for the private sector was 7.3% in the last quarter of 2022, and 4.2% for the public sector.  This is the largest growth for the private sector since the pandemic, led by the finance and business services sector at 7.4%, and construction at 6.1%.

Despite the adverse economic conditions it is too early to say that London’s labour market is loosening.  Both the number of payrolled employees and the unemployment rate ticked up.  Payrolled employees are up by 172,000 (4.2%) over the year to January.  The unemployment rate rose slightly on the quarter to December to 4.5%, and is now well above its May – August low of 4%.  The GLA Economics London labour market update provides more information.

The Bank reports that both private sector regular pay growth and services CPI inflation have been notably higher than it forecast in November.  As a result UK domestic inflationary pressures have been firmer than expected.  In part to combat this the Monetary Policy Committee voted to increase interest rates by 0.5 percentage points to 4% in February.  This is the tenth meeting in succession from December 2021 onwards when rates have risen from a low of 0.1%.

Prospects improve for major economies

Lower than expected energy and fuel prices are helping major economies.  The US economy grew faster than expected with 2.7% annual growth in the final quarter of 2022.  Higher borrowing costs, though, are impacting on underlying demand as final sales to domestic purchasers, excluding government spending, only rose by 0.2% down from 1.1% in the third quarter.  Milder weather and government support helped the Eurozone to grow by 0.1% between the third and fourth quarter of 2022 despite the predictions of economists of a downturn.

The IMF projects global growth of 2.9% in 2023, and 3.1% in 2024, down from 3.4% in 2022.  The forecast for 2023 is 0.2 percentage points higher than estimated in October.

London loses out in distribution of levelling up funds

On Thursday January 19 the Department for Levelling Up Housing and Communities (DLUHC) announced the second round of Levelling Up Fund allocations.  The fund, in total, is an additional £4.8 billion for the UK to support this agenda.  This compares with a fall in revenue expenditure by English local authorities of 23% or £29 billion in 2019/20 prices between 2009/10 and 2019/20.

London had 8 successful bids with a value of £151 million out of 111 successful bids nationally for £2.1 billion.  The capital’s share of the total pot increased from 4% to 7% between the Round 1 and Round 2 bidding rounds, which remains below London’s share of the UK population of 13%.  The value of awards to London weighted by population remained the lowest of the countries and regions of the UK, and well below the national average (Figure 3).  This is despite London having significant levels of deprivation – the capital has 12% of all neighbourhoods (Lower Super Output Areas) in the bottom quintile of the distribution for England, and 15% of all English neighbourhoods.

Figure 3:

This month the Organisation for Economic Cooperation and Development (OECD) has produced updated analysis of the extent of devolved government across countries.  52 of the 81 countries it studied had boosted regional powers and responsibilities over the last five decades.  Regional and local government expenditures have risen to reach 40% of total government expenditure across the OECD.  Previous analysis had found that devolution across OECD countries had had mixed results in improving economic performance.  The latest analysis concludes that unfunded mandates, where additional powers for subnational governments are not accompanied by the resources to deliver, lie behind lower economic growth.  These losses may exceed any benefits from devolving powers to lower tiers of government.

London’s population likely to rise more slowly than previously thought

GLA’s City Intelligence Unit has published its latest set of population projections to incorporate the results of the 2021 Census.  The latest results point toward significantly lower population growth in London than those produced a few years ago.  This reflects:

• London’s population growth slowed markedly after 2016 due to falling birth rates, a drop in international migration (due in part to Brexit), and the recovery of domestic outflows after the financial crisis
• Impacts of the pandemic.  This not only caused tens of thousands of deaths, but had a huge impact on migration flows to and from London.  The latest data from ONS estimate a net outflow of close to 130,000 people from London in the year to mid-2021
• Downward revisions of official estimates following the Census.  After rebasing to account for the results of the Census, ONS’s estimate of London’s population in mid-2021 was 133,000 lower than it would otherwise have been

Three trend variants have been published – based on 5, 10, and 15 years of past migration trends – and give projected populations for London in 2041 that span a range of 9.2 to 10.1 million.  The equivalent figure from the 2016-based projections spanned 10.5 to 10.9 million (Figure 4).

Figure 4: London’s projected population

Source: GLA 2021-based population projections

London appears to be weathering the cost of living crisis better than the rest of the UK

The latest ONS regional GDP estimates indicate that London and the North West are the only regions of England to have re-attained pre-pandemic levels of output.  By Q1 of 2021 London’s recovery had been similar to that for England, but since then London has recovered more strongly.  In the most recent quarter for which there is data (2022 Q2) London grew by 1.2%, while England’s economy shrank by 1.6% (Figure 5).

Figure 5:

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