The UK’s economic recovery lost its buzz even before Omicron appeared

The UK economy did not motor as quickly as first thought in the three months to September, according to new data. The figures will raise questions about how robust the pre-Omicron recovery was, particularly as a wave of infections and self-isolation again grips the country.

Growth has been trimmed from 1.3 per cent to 1.1 per cent in the three months to September, and the Office for National Statistics (ONS) notes that a key reason the UK’s weak performance in international trade compared to its peers.

Despite politicians highlighting the benefits of a new, post-Brexit independent trade policy, the data so far suggests that the UK has struggled to reap the benefits of the global uptick in trade volumes as major economies began to recover from the pandemic’s toll.

Goods exports fell 8.8 per cent from July to September this year. This added to current account deficit, a measure of the gap between the value of the UK’s exports versus its imports. It widened to £21.7bn in the three months to September.

One reason the UK might have seen exports fall not only with the EU, but also with other countries is the impact of Brexit on its roles as an intermediary goods producer, says John Springford, deputy director of the Centre for European Reform.

“Some businesses had been deeply integrated into EU supply chains and then faced being forced out of them,” he says. This evidence of having to reshape supply chains shows up in import and export data both with the EU and other countries. It explains why it may be harder for some British firms to import components from the EU to then export elsewhere, Springford says.

Still, while the overall picture for the third quarter was a bit gloomier than previous estimates, there was some good news. Changes to data for 2020 showed that the UK had recovered more ground in 2020 and early 2021 than prior figures suggested. This leaves the economy 1.5 per cent smaller than at the end of 2019, before the impact of the Covid-19 pandemic, a significant improvement on the previous figure of 2.1 per cent.

However, it still leaves the UK behind its peers in the G7 group of major economies, in terms of its recovery to reach pre-pandemic levels. Japan is the only G7 member with a weaker performance, at 1.9 percent below its output at the end of 2019. More timely data estimated that the economic growth barely budget, climbing 0.1 per cent between September and October.

That does not mean that it is untrue, as the government often states, that the UK is not going to experience fast growth in the next couple of years, based on estimates from the Organisation for Economic Co-operation and Development (OECD). If the UK does record, as the OECD forecast earlier this month, growth of 6.9 per cent for 2021, then it will have outpaced other G7 economies. But that comes after its gross domestic product (GDP) fell faster and harder in 2020. So it is does not tell the whole story.

These latest data from the ONS also fail to capture the impact of the Omicron variant on consumer confidence, be it shopping in the lead up to Christmas, or the stark financial hit to hospitality amid government suggestions to minimize social contacts at a critical time for their balance sheets.

While the Treasury announced £1bn of support for some of the worst-hit sectors this week, it will offer slim pickings compared to normal seasonal takings, sector experts and economists have warned.

According to Bethany Beckett, UK economist at Capital Economics, “with early signs the Omicron variant has hit activity, growth is sure to have slowed further in Q4”.

There is also the spectre of additional restrictions as early as next week. As a small share of a big number – those Omicron cases that may be milder among a population with high antibody levels, from vaccinations and prior infection – could yet prove enough to put the NHS under unsustainable pressure.

As Beckett says, “these data are old news,” and now, “the prospect of tighter restrictions in January is further darkening the outlook.”

Economists at Pantheon Macroeconomics expect UK growth to standstill at 0 per cent in the first quarter of next year, as household real disposable incomes fall by around 1 per cent due to inflation and higher taxes. Omicron is already “hitting the economy hard” they note.

Restrictions do cause economic pain, there’s little doubt. But what has emerged in the great Covid economic experiments of recent years, is that with significant government support, the UK’s GDP has tended to rocket back quite quickly. This has defied some forecasts of scarring, which attempted to estimate the long term damage of the pandemic to output.

Still, it depends not only on domestic fiscal policy, but also on the ability of supply chains to recover from extreme disruption triggered by the pandemic and in the UK’s case, also Brexit. If Omicron proves especially hard to manage and continues its global spread, or a new more troublesome variant takes hold, it could put further pressure on the freight and logistics industries, and supply bottlenecks could be further squeezed.

With this latest data confirming a weakened economic backdrop even before Omicron rate setters at the Bank of England might be a bit more nervous about further hikes, beyond the current key rate of 0.25 per cent.

And, as ever, Brexit is not done, but rather an ongoing process of decoupling. There are fresh barriers ahead for trade with the EU, the UK’s single largest trading partner coming in the new year. The impact could be to dampen the UK’s relative export performance further, and potentially add some fuel the already decade-high rate of inflation.

Above all, the data reaffirms that even without a fresh lockdown, the UK still faces a tough road ahead in its Covid recovery and future growth: Businesses will need the ability and confidence to invest - not something borne out in these figures. Consumers need to feel secure enough to spend even in the face of higher inflation and hefty taxes, if the UK’s to even come close to maintaining its much-touted growth rate.