Covid spending fuelled faster growth in UK economy in late 2021, ONS says

The UK economy was only 0.1% below pre-pandemic levels after growing faster than previously thought at the end of 2021 because of a rush of coronavirus test-and-trace activities, the latest official data has shown.

UK economic output grew by 1.3% from October to December, compared with an initial estimate of 1%, despite the Omicron variant denting output over Christmas, the Office for National Statistics said on Thursday.

Revisions to estimated growth in 2021 and 2020 mean the economy is now thought to have ended 2021 0.1% shy of its pre-Covid-19 level, compared with a previous estimate of 0.4%. However, increased government spending has made up much of the shortfall, and growth remains well off the trend that would have been expected before the pandemic began.

The government ordered a surge of coronavirus testing and a huge programme of booster vaccine shots at the end of November as Omicron spread, in turn fuelling a large rise in state spending, which sustained economic output.

The pandemic lockdowns caused the biggest economic recession since comparable records began, followed by the fastest annual economic growth since the second world war in 2021.

The huge volatility in output has caused the UK’s statisticians difficulties in measuring the economy, and the ONS has warned of larger than usual revisions. On Thursday it said the 2020 recession was slightly less severe than expected, with a decline of 9.3%, meaning the recovery through 2021 was slightly smaller, at 7.4%.

The data showed household consumption was now 1.1% below its pre-coronavirus level, after a downward revision that comes as consumers face rising prices of energy and basic goods that have prompted a cost of living crisis.

Paul Dales, chief UK economist at Capital Economics, a consultancy, said the spending revision suggested the squeeze on real incomes was starting to bite, although the decrease in the saving rate was providing a cushion.

“The 0.1% quarter-on-quarter fall in real household disposable incomes was smaller than we had expected. But it was the third decline in as many quarters and the big increases in prices that lie ahead means further falls are on their way,” he said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, another consultancy, highlighted that output excluding government spending remained 2.9% short of the pre-pandemic high.

“Exports were a hefty 15.7% below their 2019 fourth quarter level – the worst performance in the G7, by some distance – greatly exceeding the 6.4% shortfall in imports,” he said. “Exports have consistently underperformed relative to other advanced economies since the first quarter of 2021, suggesting that Brexit is largely to blame.”

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