The UK economy took another step towards recovery today, with the news that GDP increased by 4.8% between April and June.
The figures for the second quarter were driven by an increase in consumer spending, as lockdown restrictions across the UK were gradually eased and the economy re-opened over the spring and early summer. The return of indoor hospitality, retail and hotel stays were cited as the key sectors supporting the overall GDP rise, contributing a higher than expected 7.3% increase in spending.
While the rise was welcomed, however, it did fall short of the Bank of England’s expectations of 5%. There are also fears that July’s monthly figures are unlikely to be as strong following the ‘pingdemic’, with the impact on staff shortages and supply chains of thousands of workers forced to self-isolate.
International comparisons also present a mixed picture. The UK’s recovery is among the fastest of the developed economies, but its fall during the pandemic was also one of the sharpest. The UK economy is now 4.4% smaller than before COVID. In contrast, the EU is slightly ahead at 3% smaller, while the US has fully recovered its position, though the spread of the delta variant and big geographical variations in vaccination rates suggest a few clouds on the horizon.
Responding to the figures, Shadow Chancellor Rachel Reeves said that the government had presided over the ‘worst economic crisis of any G7 country’ and argued that it had failed to tackle underlying insecurity in the economy, building on Labour’s recess campaign theme of making ‘Britain the best place to work’.
The Chancellor, Rishi Sunak, said today’s figures showed the UK economy was ‘bouncing back’, but acknowledged there are still ‘challenges to overcome’.
Those challenges include the end of government support with the final tapering off of the furlough scheme and the mountain of debt facing businesses and government. While figures last week showed that fewer than expected businesses had missed repayments on state-sponsored Bounce Back loans, defaults are still forecast to be around £5 billion.
A tough spending review is also looming and while mixed signals have been sent about whether to expect another full Budget in the autumn, the scale of the squeeze facing public finances and the firm approach the Chancellor is determined to take on spending have both been well-trailed. The key economic and political risk, however, is creeping inflation, with Labour focussing their attack on the government around the knock-on impact on cost of living.
Recent polling has also suggested that the vaccine boost to the government’s rating is starting to wear off. With 75% of adults having received both doses and case numbers – so far – holding steady far below the forecasts predicted by scientists, the public are increasingly asking ‘what next?’
If we are – finally – approaching the point at which COVID becomes semi-permanent background noise rather than the only issue consuming British politics, expect the public to quickly adjust to the new normal and demand delivery on domestic and economic issues, not least the cost of living and the taxes that will be needed to fund social care reform and net zero.
Today’s figures, then, show that while the economy may almost have bounced back, so too will politics as usual.