UK Growth Upgraded, Real Disposable Incomes Increase: ONS

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The ONS upgraded its previous estimates for the growth in the UK economy following the introduction of more accurate measurements and revealed households saw an uptick in real disposable income.

The UK economy grew 0.6% year-on-year in the second quarter, up on the previous estimate of 0.4%, with the first quarter's growth being revised higher to 0.5% y/y.

Second-quarter growth remained at 0.2% on a quarter-on-quarter basis while the first quarter was revised up from 0.1% to 0.3% q/q said the ONS.

The changes come after the ONS introduced an upgrade to its methodology in keeping with global best practices as set out by the OECD. "The ONS has incorporated better data on businesses’ costs, inventories, and the volume of healthcare work, and has made some methodological changes to improve the international comparability of its GDP estimates," explains Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics.

Falling inflation appears to have helped the economy with much of the growth in the latest quarter being attributed to a 1.2% increase in the production sector, where there were increases in 9 out of the 13 sub-sectors.

The ONS said this reflects falling input prices across the quarter relieving some pressure on manufacturers.

Above: Source: Quarterly sector accounts from the Office for National Statistics

Also explaining the resilience is the ending of the Cost of Living Crisis, with the ONS reporting real households' disposable income (RHDI) grew by 1.2% in Quarter 2 (Apr to June) 2023 following no change in the previous quarter. The ONS also said income (driven by a rise in social benefits and increased wages and salaries) grew more than expenditure.

The improvement in the position of UK households is revealed on the same day the Lloyds Business Barometer survey showed businesses remain upbeat about the coming months, suggesting the UK economy can continue to grow and avoid recession.

The ONS also reveals the UK economy grew faster than all other G7 peers in 2021 and 2022, something of a surprise when one considers the reams of perma-bear predictions issued by institutional analysts and takes by the media.

Above: Real GDP growth for the G7 economies. Percentage change, quarter-on-quarter and annual growth, real gross domestic product (GDP) for 2021 to 2023.

Despite the updates to UK economic growth, economists at Investec say the UK economy will still fall into a recession over the winter period.

"Altogether, we see little in today’s numbers to derail our expectation of a more challenging growth picture ahead: we continue to forecast that the UK economy will enter a recession over the winter months, a view that fits with the clear weakening in the most recent survey data," says Sandra Horsfield, an economist at Investec.

But Pantheon Macroeconomics says a recession will be avoided in the second half of this year. "The pace of consumer price rises has slowed substantially, lifting confidence. While wage growth will slow as labour market slack continues to build gradually, it likely will not fall as sharply as CPI inflation," says Tombs.

The UK economy is now some 1.8% larger than its pre-pandemic size as a result of the updated methodology incorporated by the ONS, ensuring the UK is no longer a G7 outlier.

"We recently announced updates on our estimates of GDP up to 2021 with newly available data, including on taxes and costs – which can take a while to collect. As a result, the economy fell less in 2020 and grew more in 2021 than we previously estimated," says Craig McLaren, Head of National Accounts at the ONS.

The ONS said the revisions reflect the latest available data as collecting and publishing estimates for growth during a once-in-a-century pandemic proving difficult.

"The revisions performance for the UK economy in normal times compares well with the best in the world. So we are confident that moving forward both our initial and later estimates for growth will remain a trusted data source for economic policymakers," says McLaren.