UK economy makes slow start to 2023 as inflation weighs
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[June 30, 2023] By
David Milliken and Andy Bruce
LONDON (Reuters) -Britain's economy made a lacklustre start to 2023 as
inflation ate into households' disposable income, official figures
showed on Friday, and economists see a risk of recession ahead as higher
interest rates keep up the pain even as inflation eases.
The economy grew by just 0.1% in the first three months of the year,
unchanged from an initial estimate by the Office for National
Statistics' (ONS), and leaving output 0.5% lower than it was in the
final quarter of 2019, before the COVID-19 pandemic.
Households dug into their savings - although the overall saving ratio
remained higher than before the pandemic - and the cost of living
increased faster than incomes.
The squeeze on households looks set to continue, as the Bank of England
raised interest rates to a 15-year high of 5% in June and investors see
little sign that it is about to end its tightening cycle.
"The final Q1 2023 GDP data confirms that the economy steered clear of a
recession at the start of 2023. But with around 60% of the drag from
higher interest rates yet to be felt, we still think the economy will
tip into one in the second half of this year," said Ashley Webb, an
economist at consultancy Capital Economics.
![](http://archives.lincolndailynews.com/2023/Jun/30/images/ads/current/napa_sda_HEROES_2023.png)
While the BoE forecast last month that inflation would drop to just over
5% by the end of the year, BoE Governor Andrew Bailey said last week
that inflation was proving stickier than expected after it held at 8.7%
in May.
Britain's economic recovery since the pandemic has been much slower than
almost every other big advanced economy, though Germany has struggled
too and its economy in the first quarter was also 0.5% smaller than
before the pandemic.
In annual terms, Britain's economy had grown just 0.2% by the end of the
first quarter.
Some economists said the weak GDP data stood at odds with more robust
trends for jobs, wages and consumer confidence, and further sluggish
growth was more likely than outright recession.
"We expect unemployment to inch up, but only slowly and to a limited
degree," HSBC economist Liz Martins said.
INFLATION SQUEEZE
British households have been put under pressure by a surge in inflation,
which hit a 41-year high of 11.1% last year after Russia's invasion of
Ukraine sent natural gas prices soaring, and has been slow to fall
since.
Friday's figures showed households' real disposable income - money
available after adjusting for inflation, taxes and benefits - was 0.8%
lower than the previous quarter. This was the biggest drop since the
second quarter of 2022, and 0.5% lower than a year earlier, reflecting
higher costs for electricity, gas and food.
![](http://archives.lincolndailynews.com/2023/Jun/30/images/ads/current/charrons_bch_2022.png)
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![](../images/063023PIX/busine2.jpg)
Customers shop at a fruit and vegetable
stall at Portobello Road in London, Britain, March 31, 2023.
REUTERS/Toby Melville
![](http://archives.lincolndailynews.com/2023/Jun/30/images/ads/current/graue_lda_GREYTRUCKpreowned_062623.jpg)
There were also signs that people are saving less in response to the
increased cost of living, as the savings ratio fell to 8.7% in the
first quarter from 9.4% in the quarter before, its lowest level
since the second quarter of 2022 though well above its pre-pandemic
average of just over 5%.
The ONS recorded a net withdrawal of money by households from bank
accounts for the first time since records began in 1987. As well as
funding living expenses, economists said these moves could reflect
richer households moving savings to investments that pay a higher
return, as interest rates on many bank accounts have failed to keep
up with rising BoE rates.
Mortgage repayments also exceeded new borrowing by a record 5.2
billion pounds ($6.6 billion), as people became warier about taking
out new debt at a time of sharply rising interest rates.
House prices in June were 3.5% lower than a year earlier, the
biggest annual fall since 2009, according to other figures released
on Friday by the Nationwide Building Society, and BoE data on
Thursday showed trends for mortgages and bank accounts similar to
those in the ONS figures extended into May.
There was some brighter news on business investment, which rose by
3.3% in the first quarter, the biggest increase in a year. However,
the ONS reported anecdotal evidence it was driven by companies
rushing to invest ahead of the March 31 expiry of the
"super-deduction" tax break on capital projects.
That policy was replaced by a new one of full expensing for three
years, but businesses have long complained that the lack of
long-term clarity over corporate tax policy had fostered a
stop-start approach to investment in Britain.
Britain's underlying current account deficit also narrowed to 2.6%
of GDP from 3.3% of GDP in the final quarter of 2022, after
stripping out volatile flows of precious metals, as preferred by the
ONS.
![](http://archives.lincolndailynews.com/2023/Jun/30/images/ads/current/peasley_sda_PROMGRAD_2023.png)
The total current account deficit including precious metal flows
totalled 10.8 billion pounds in the first quarter, above economists'
forecast of 8.5 billion pounds in a Reuters poll and equivalent to
1.7% of GDP.
($1 = 0.7914 pounds)
(Reporting by David Milliken and Andy Bruce; editing by Sarah Young,
Frank Jack Daniel and Kim Coghill)
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