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What Westminster isn’t telling you about our GDP figures

Jeremy Hunt says the UK economy is back to “full health”, but Rachel Reeves claims we have gone from “no growth to low growth”. Who’s right?

By Will Dunn

Jeremy Hunt will be basking not only in the sunshine today but also in the warm glow of the latest GDP figures, which show the UK economy leaving its technical recession behind and rocketing upwards with 0.6 per cent growth in the first quarter of the year.

This is the fastest economic growth for two years, comfortably beating the Bank of England’s prediction yesterday that GDP would grow by 0.4 per cent in the first quarter of this year.

The Chancellor says this shows the economy “returning to full health” and that “our long term prospects are the strongest of any major European economy”. Rachel Reeves says this is the UK going from “low growth to no growth”. Who’s right?

“The reality is that both of them are talking bollocks,” says Simon French, chief economist at the investment bank Panmure Gordon and one of the few economists to correctly predict the stronger growth revealed today. “Are we bottom of the pile, as Rachel likes to pretend? No. Are we world-beating, as Jeremy’s Twitter account likes to pretend? No.” In international terms the UK has moved from fourth to third place in the G7 for GDP, and remained at fifth place for per-capita GDP. “We’re in the middle of the pack.”

French says the Bank of England’s more pessimistic prediction was based on the idea that the large rise in “precautionary savings” last year would continue to rise, whereas he thinks it will fall – people will start to spend more, and that higher consumption will contribute to economic growth. This appears backed up by consumer confidence, which recently hit a two-year high.

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That said, our per-capita GDP will probably be revised downwards in the coming months because the current GDP figures have been calculated using older population estimates. When these are updated, that economic activity will be spread across more people, so the total amount of growth per person will fall. Eventually, this too will become a net positive (each immigrant typically contributes more to the economy over time, as their earning power increases), but this will take decades.

It’s fairly unlikely that grateful Brits will deck their cul-de-sacs with bunting this weekend to celebrate the UK’s victory over a brief technical recession. Last June, an Ipsos poll found that 61 per cent of people believed the country was already in a recession (at that point, it wasn’t), so it seems most of us won’t realise the recession is over.

In fact, a warming economy could make some people feel poorer: as the Bank’s Monetary Policy Report explained yesterday. External inflationary pressures may have reduced but the UK still has a tight labour market. These elevated wages are contributing to services inflation and businesses expect to raise prices by around 4 per cent over the coming year. The Bank’s job is to keep a lid on these more persistent domestic inflationary pressures. A faster-growing economy could mean it holds interest rates at their current 15-year high for longer than it would have done, which could make some people (particularly those refinancing their mortgages) feel poorer, even as the Chancellor tells them things are looking up.

[See also: In search of the green and pleasant land]

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