Big Upgrade to UK GDP Growth for Q2

UK Economic growth for the second quarter of 2021 was revised higher by the ONS, meaning the economy is closer to where it was pre-pandemic than originally expected.

GDP growth for Q2 read at 5.5%, higher than the original estimate for growth of 4.8%.

GDP growth in the year to Q2 read at 23.6%, which is higher than the 22.2% originally calculated.

This means the UK's level of GDP is now 3.3% below where it was pre-pandemic in Q4 2019, revised from the previous estimate of 4.4% below.

Above: Real GDP in Quarter 2 (Apr to June) 2021 is now 3.3% below its pre-pandemic level (Quarter 4 2019). Source: Office for National Statistics – GDP quarterly national accounts

"The upward revision to GDP in Q2 means the economy does not have as far to recover from the COVID-19 crisis," says Ruth Gregory, Senior UK Economist at Capital Economics.

The ONS says the contribution to the better-than-expected outcome was broad, coming from wholesale and retail trade, accommodation and food service activities, education and human health, and social work activities.

The importance of household expenditure to the UK economy was laid bare with the ONS reporting there were increases in all main components of expenditure, with the largest contribution from household consumption, which contributed a whopping 4.0 percentage points to the 5.5% headline growth.

But while the ONS says household spending did increase during the period it remains 7.0% below its Q4 2019 peak.

And recent concerns that consumer expenditure has fallen back through the summer and early autumn - amidst supply chain constraints, surging energy prices and rising inflation - leading economists to warn the UK economy has most likely stalled in the third quarter.

The Bank of England released data on Wednesday showing consumers borrowed just £0.4BN in August, well shy of the average +£1.2BN seen in the two years before the Covid pandemic.

The data comes before September's surge in energy prices and a run on the forecourts by consumers increasingly alert to global and domestic supply issues.

Nevertheless the ONS says a rise in household spending of 7.9% in Q2 saw the household saving ratio decrease to 11.7%, compared with 18.4% in Q1, which was the second highest on record.

The recovery is intact, although it has become increasingly bumpy of late.

The ONS says the UK's recovery in the second quarter was the fastest amongst the major G7 economies, but only the U.S. has recovered to pre-pandemic levels:

Above: Percentage change, nominal and real GDP, Quarter 4 (Oct to Dec) 2019 to Quarter 2 (Apr to June) 2021. The UK, like all G7 economies (except the US), is still to recover to its pre-pandemic levels of real GDP. Source: Office for National Statistics – GDP quarterly national accounts.

"The upward revision to GDP in Q2 brings the U.K. economy’s performance in line with other G7 economies," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

The ONS says there was an increase in services output of 6.5% in Quarter 2 2021, revised upwards from a first estimate of 5.7%.

The services sector is the largest component of then UK economy and its recovery was accelerated by the easing of restrictions in Q2.

Services output is now 2.2% below Q4 2019 levels, revised up from 3.5% below.

Business investment rose by 4.5% quarter-on-quarter in Q2 and exports jumped 6.2% in a rebound from Brexit-related weakness seen in Q1, exceeding the 2.4% increase in imports.

But a slowdown in UK economic growth during the summer was most recently confirmed by the release of official GDP data for July from the ONS.

They reported the UK economy grew just 0.1% month-on-month in July, significantly lower than the 0.6% the market was expecting.

"With the recovery having faltered in Q3, the risks to our GDP forecast remain skewed to the downside," says Gregory.