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Risk of recession rising as headwinds mount

Author: ICAEW Insights

Published: 30 Jun 2022

Latest official GDP estimate confirms an alarming loss of momentum for the UK economy in the first quarter of 2022 amid falling business investment and real household incomes.

 The quarterly national accounts released on Thursday 30 June 2022 by the Office for National Statistics (ONS) reported that UK gross domestic product (GDP) is estimated to have increased by an unrevised 0.8% in Q1 2022, down from 1.3% in the previous quarter. The level of real quarterly GDP in the UK remains 0.7% above its pre-COVID-19 level in Q4 2019.

By sector, services output rose by 0.6% in Q1 2022, upwardly revised from a first quarterly estimate of 0.4% and is now 1.5% above pre-Covid levels. The rise in services output was driven by an increase in output from information and communication (4.2%), amid rises in computer programming and information service activities. 

Human health and social work activities fell by 2.3% in Q1 2022, reflecting a large fall in COVID-19 detection activities, such as NHS Test and Trace and the COVID-19 vaccination programme. 

Production output rose by a slightly revised 1.3% in Q1 2022 but remains 1.7% below its pre-coronavirus levels. Construction output rose by 2.2% in Q1 2022, revised down from the first estimate of 3.8%.

The latest figures also revealed that household incomes and spending rose in cash terms in Q1 2022. However, Real Household Disposable Income (accounting for inflation) fell by 0.2%, the fourth consecutive quarter of real negative growth. This is the longest stretch of negative outturns since records began in 1955. Although nominal household income grew by 1.5% in Q1, it was more than offset by quarterly household inflation of 1.7%

Business investment fell by 0.6% in Q1 2022, down from the previous estimate of a 0.5% decline. Business investment is now 9.2% below its pre-COVID-19 level, compared to overall UK GDP, which is 0.7% above its pre-pandemic level. Declining spending on transport equipment amid ongoing supply-chain disruption was a key driver behind the overall drop in business investment in the first quarter.

The UK’s trade deficit widened to a record 5.4% of nominal GDP in Q1 2022, primarily reflecting a rise in goods imports. However, the ONS states caution is needed when looking at this data because of changes to the collection of data on UK imports from the EU.

Commenting on the latest ONS Quarterly National Accounts, published, Suren Thiru, Economics Director at ICAEW, said: “Markedly slower growth confirms an alarming loss of momentum for the UK economy in the first quarter.

“The first quarter slowdown is likely to be followed by a mild contraction in economic output in the second quarter as surging inflation, soaring energy bills and higher taxes suffocate economic output by suppressing consumer spending and business investment. 

“Declining health sector output following the scrapping of free COVID-19 testing in April and the extra bank holiday in June are also likely to drag on second quarter UK GDP.” 

For further information, read the GDP quarterly national accounts for Q1 2022.

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