Fourth quarter GDP figures put brakes on progress throughout the year

New figures on economic growth today gave a mixed picture, with warnings that the UK is “caught in a low growth trap”.

The Office of National Statistics released GDP data which showed, overall, the UK economy grew by 7.5% year-on-year, bouncing back from the impact of the coronavirus pandemic.

But figures for the fourth quarter, between October and December, revealed growth was fairly static, at just one per cent.

The economy shrank 9.4% during 2020, when pandemic lockdowns first hit, and the latest figures show it remains 0.4% below pre-pandemic levels.

During December, GDP levels shrank by 0.2%, compared with the previous month, mainly because consumers brought forward their Christmas purchases amid warnings of supply chain disruption and tighter COVID restrictions, such as guidance to work from home, as the Omicron variant began to take its toll on the NHS.

However, there are fears for further progress, as inflation is tipped to rise in the coming months, driven by impending tax rises and soaring energy costs, following the increase of the energy price cap by almost £700 and a further price cap rise to come later this year.

Last week the Bank of England warned of a record slide in living standards driven by the gloomy economic news hitting people’s pockets.

Rain Newton-Smith, CBI chief economist, said: “The UK economy saw a lacklustre end to the year hit by the emergence of the Omicron variant and Plan B restrictions.

“While the worst of the impact appears to be over, firms are still grappling with supply shortages and cost pressures, while households are facing a looming cost of living crisis.

“We’re caught in a low growth trap, and the only way to get out is a relentless focus on competitiveness.

“A 100% permanent investment deduction can trigger a chain reaction of business spending across the whole economy. And a future-focused approach to regulation and skills will be vital to help us avoid another lost decade of growth.”

Walid Koudmani, chief market analyst at financial brokerage XTB, said: “Today’s GDP data continues to show promising signs of the post-pandemic recovery and may encourage the Bank of England to continue with its aggressive fiscal and monetary policy change which has seen it already increase interest rates twice while other major central banks appear to be more reluctant.

“While rising inflation and supply issues continue to impact growth and price stability, there appear to be signs of easing across several sectors as they resume somewhat normal operations.”

Federation of Small Businesses (FSB) national chair, Mike Cherry, said: “This raft of new data shows us that our economic recovery is not yet under way in any true sense.

“As last year ended, pent-up demand should’ve had consumers spending right up to Christmas day and beyond. Instead, the economy actually shrank as Omicron anxiety took hold.

Mike Cherry

“Meanwhile, our small firms that do business internationally were held back by both worldwide supply chain disruption and an ever-growing mountain of new trade paperwork.

“At the same time, close to £1bn-worth of business support grants for those most in need are still yet to reach them. It’s exasperating to see that, after all this time, some authorities still haven’t got their houses in order.

“Against a backdrop of surging prices and labour shortages, we’re now hurtling towards the unwinding of remaining COVID support measures, a national living wage increase and a regressive hike to national insurance contributions in April.

“Unless policymakers intervene before this April flashpoint to cancel the jobs tax hike and alleviate the mounting wider pressures that small firms face, we risk long term scarring of the economy and local communities.

“In the North West and West Midlands, where the Government intends to launch levelling up accelerators, the NICs hike will hit small employers to the tune of £800m-worth of additional outgoings a year. That’s money that should be being spent on investment, upskilling and expansion.”

Danni Hewson, financial analyst at investment platform AJ Bell, said: “Many businesses called it ‘lock down by stealth’ and concerns about the Omicron variant did take a toll on the UK economy in December. People made tough choices as they fought to have a Christmas with family and friends. They cancelled restaurant bookings and hair appointments and stayed away from high street stores. As a result, consumer facing services pressed the breaks on the UK economy which had finally found the accelerator pedal in November, even if it hadn’t quite found the gear the last set of figures suggested.

“Anyone struggling to pay those rising gas and electricity prices won’t be pleased to note that extraction of crude oil and gas was down 2.7% in December. But the last month of the year wasn’t all doom and gloom, the rush to file those tax returns, a surge in testing and tracing and a decent return to form by the construction sector all helped prevent major slippage and there was an upswing in manufacturing, primarily thanks to an increase in pharma production.

“And looking over the last quarter as a whole there’s plenty to be positive about. Consumers had been out and about in their droves making the most of Black Friday deals which filled shops and our roads. White van man certainly had a busy a quarter as did travel agents and with travel already bouncing back after its December setback it’s likely the start to 2022 will follow that trend. There was also a surge in activity at employment agencies in the last three months of the year as workers jostled to fill the glut of positions and, no doubt, secure better rates of pay.

“2021, as a whole, did deliver a storming performance with record growth of 7.5%. Yes, we need to consider that growth came off the back of 2020’s spectacular contraction when lockdowns stopped almost everything in its tracks, but when you compare the UK’s performance to other G7 countries over the last year it stands head and shoulders above the rest of the pack. By the final quarter the UK had lost ground as Spain, the US and Canada rocketed forward, but Omicron is likely to have played a big part in that story.”