The UK economy is ‘tepid’ because it has barely grown in four years

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Daniel Thomas Business correspondent, BBC News Jul 13 2023 07:12 GMT

Updated 10 minutes ago

Image source, Getty Images

The UK economy has barely grown since 2019 before the pandemic hit, with one economist describing it as “tepid”.

It contracted 0.1% in May, in part because of the extra bank holiday for the coronation of the king, which meant there was one less business day than usual.

The rising cost of living and rising interest rates have put pressure on households and businesses.

When the economy contracts, people may lose their jobs and find it difficult to get wage increases to keep up with prices.

Inflation – the annual rate at which prices rise – is at 8.7%.

The Bank of England has been introducing interest rates to try to slow rising rates, but this is having a knock-on effect on consumers’ borrowing costs, driving up mortgage payments and loan repayments to millions.

Chancellor Jeremy Hunt said high inflation was hitting the economy.

“The best way to get growth moving again and ease the pressure on families is to lower inflation as quickly as possible. Our plan will work, but we must stick to it.”

It said the manufacturing, energy and construction sectors fell in May, along with sales at pubs and bars.

But she said the health sector recovered while the information technology sector had a “strong month”. The strikes also had less impact on the economy than in April.

The ONS said the coronation – which means there were three public holidays in May, instead of the usual two – led to a slowdown in some industries, but benefited others such as arts and entertainment.

For most people, economic growth is good. This usually means that there are more jobs and companies are more profitable and can pay employees and shareholders more.

The higher wages and greater profits seen in a growing economy also generate more money for the government in taxes.

It can choose to spend more on benefits, public services and the wages of government employees, or cut taxes.

When the economy contracts, these can reverse — but governments usually still have a choice about public spending.

Capital Economics said the 0.1% decline in May was “not as bad as it seems as some of it was due to the extra bank holiday for the coronation of the king”.

It added that gross domestic product – the official measure of economic growth – was on track to rise by about 0.1% in the three months to June.

“Our sense is that underlying activity is still growing, albeit at a slow pace,” said Paul Dales, UK chief economist.

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, warned that the May figures showed growth “still tepid”.

“The bigger picture is that the economy remains weak,” said Martin Beck, chief economic advisor to economic forecasting group the EY Item Club.

“It didn’t grow at all in the three months through May, and in May the economy was only 0.2% larger than it was before the Covid pandemic, so we’ve seen almost no growth since the end of 2019.”

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