(Bloomberg) -- The UK is the only Group of Seven economy that has yet to fully recover from the coronavirus pandemic, official figures show.

Revisions dating back to the start of the Covid-19 outbreak mean that gross domestic product in the second quarter was still 0.2% below its level at the end of 2019. It was previously estimated to be 0.6% above. 

The deterioration will add to the pressure on Prime Minister Liz Truss’s embattled government, which has been hit by a run on the pound and a financial crisis since the mini-budget last Friday. That culminated in a rare intervention by the Bank of England on Wednesday, when it pledged up to £65 billion ($73 billion) to stabilize markets over two weeks.

The economy grew by 0.2% in the second quarter, an improvement on the 0.1% contraction first estimated, the Office for National Statistics said. That means Britain is not yet in recession, as many had assumed. However, past revisions mean the level of output was still 0.8% lower than previously thought. 

The slump is now likely to have started in the third quarter when output probably contracted because of the extra bank holiday for Queen Elizabeth’s funeral. Economists believe further declines are likely in the next two quarters.

Slump Starting

Consumers and business struggling with near double-digit inflation are now braced for steep increases in the cost of borrowing as a result of the government announcing the biggest tax cuts since 1972.

The BOE benchmark rate, currently 2.25%, is expected to reach around 6% next year, dealing a blow to the housing market, business investment and consumer spending.

The pressure on consumers was evident in the second quarter as wage growth failed to keep pace with inflation. That squeeze has since intensified, with inflation reaching its highest in four decades.

Adjusted for inflation, household disposable incomes fell 1.2% between April and June, a fourth straight quarter of decline for the first time since 2016. Households sought to maintain their spending by saving less of the income, cutting the saving ratio to 7.6% from 8.3% in the first three months of the year.

How well the economy holds up will depend on the readiness of people to spend more of their income and draw down an estimated £200 billion of excess savings built up during the pandemic, when lockdowns restricted opportunities to spend.

The current-account deficit, the gap between money coming into the U.K. and money leaving, narrowed to £33.8 billion ($37.6 billion) in the second quarter, the equivalent of 5.5% of GDP. 

The trade deficit narrowed, and there was big drop in the deficit in investment income from £6.1 billion to £2 billion. This was due to the repatriation of strong overseas earnings in the oil and energy sector.

The figures are unlikely to ease concerns about the willingness of foreign investors to keep funding the deficit by buying British assets. 

In recent years, Britain has had no problems funding its spending habits. Foreigners attracted by a robust legal and financial systems and the prospect of decent investment returns have proved eager buyers of British firms and high-end London properties. They also bought UK equities and debt. 

However, the market rout of recent days suggest they are losing faith in the UK. The current-account deficit this year is forecast by the IMF to be the highest among G-7 nations.


©2022 Bloomberg L.P.