Economy in brief: September 2023

It’s the economy Jim, but not as we know it…

We’ve just had a fresh bit of history-re-writing from the ONS, and it’s so interesting that the ONS have reported themselves to their own regulator. Revisions occur typically because new data is incorporated, and because methodologies improve over time – revisions due to error are considerably rarer. And that’s the case this time, plus the large swings in the economy during covid were likely to entail larger revisions to match. Getting back to the facts: the UK economy recovered its post-pandemic losses in Q4 2021 (earlier than thought): the economy grew by 8.7% in 2021, rather than 7.6% and the decline in 2020 has been reduced in scale from -11.2% to -10.4%. This better-than-thought pandemic performance makes the UK middle of the pack for the G7 rather than bottom. This may explain the surprising persistence in underlying inflation: if growth has been stronger relative to potential than previously expected, that would lead to stronger wage and price pressures.

Western economies are weakening

The US and UK economies have shown striking resilience to interest rate rises so far this year, with the Eurozone showing weaker momentum given greater exposure to the Ukraine war and to the weakness in the Chinese economy. The US economy has been supported by structural demand for housing in relation to an ageing population (older people tend to demand smaller housing units in larger numbers) and policy support for infrastructure (super conductors and the green transition in particular) in combination with onshoring. In the UK, the favourable tailwinds from the rapid fall in energy prices last winter have supported consumer confidence and spending this year, despite sticky inflation, reinforcing a strong labour market. All three economies are now showing signs that the pace of growth is slowing following rapid rises in interest rates. The jobs markets in both the US and the UK are turning, with job-to-job moves falling, and our surveys show that in the UK, private sector momentum is slowing, with firms pulling back investment plans in the face of rising concerns about financing costs. Strikes are also affecting public sector output in the UK, with knock-on effects for the private sector from having operations delayed and having to provide childcare when schools are closed.

Heading into the Autumn policy-making hiatus

The outlook for UK growth is pretty anaemic as sadly the UK’s productivity challenge has not been entirely revised away by the ONS. Investment and innovation (broadly defined) are the driving forces behind productivity, and with the public finances tight and interest rates high, the broader policy landscape needs addressing to ensure that it is fully maximizing the potential for private investment to do the heavy-lifting. This includes implementing the Edinburgh reforms, reforming the tax system (as per our summer report),  and practical steps to support the green transition (as per our other summer report) to bridge the gap between rhetoric and reality. It is clear from conversations with CBI members that the planning system is in desperate need of reform to significantly speed up major investment decisions, particularly large-scale infrastructure. And the state of the labour market, with many millions inactive with long-term health conditions, continues to constrain activity and drive up costs. All in all, plenty to get our teeth into.