Economic update: slow growth and more government spending

After last month’s unexpectedly weak performance, the UK’s economy has remained in fairly unspectacular territory during September. Although it is no longer shrinking, neither is it showing great stability. New Prime Minister Boris Johnson’s first major economic announcement (the Spending Round) has committed the UK to higher public spending, likely to be funded from additional borrowing. However, the economy is still supported by a consistently strong labour market. 

The UK may avoid recession – but growth is still flat

GDP grew in July by 0.3%, having shrunk in the previous month. This has eased economists’ worries of a recession, but flat growth over the slightly longer term (0% in May-July compared to the previous quarter) means that the economy is still weak. Economic growth around the world similarly continues to be lacklustre. 

A bar chart showing GDP growth, 3 months % change on previous 3 month period. During May-Jul 2019, GDP growth was flat when compared to the previous quarter.

Economic performance was better than expected because of strength in the services sector, which grew by 0.2% over the quarter, while output in manufacturing and construction fell. With a little over one month to go until the UK is set to leave the EU on 31 October this may reflect businesses stockpiling and making other preparations. 

Inflation refuses to settle down

The CPI inflation figures have now surprised economists for two months in a row, unexpectedly coming in 0.1 percentage points above the Bank of England’s 2% target in July and 0.3 points below it in August. This turbulence may reflect the uncertainty in the economy; however, both of these months’ figures remain close to the target, which may help to explain why the Bank’s Monetary Policy Committee unanimously chose to keep interest rates steady at 0.75% at its September meeting. 

A line chart showing consumer price inflation since 2016, along with the 2% inflation target. During 2019, inflation has bounced around the 2% inflation target. In the latest month, August, CPI was 1.7%.

Borrowing rises as Government opens the spending taps 

September saw the Spending Round, at which Chancellor Sajid Javid set departmental spending limits for next year. This means that total public spending in 2020-21 is now set to be over £13 billion higher than in previous plans. The Chancellor said that his spending plans could be delivered within the Government’s target for borrowing. Recent events make such an outcome look less probable. Government borrowing has been increasing during the current financial year and the OBR say that borrowing in 2019/20 is on course to exceed the level forecast in March 2019. Perhaps more significantly, this month the ONS has implemented improvements to the accounting treatment of student loans, increasing borrowing by over £12 billion a year.  

The labour market continues to do well 

Despite a weak economy and an uncertain outlook, the labour market remains in positive territory. The employment rate is at a record high and unemployment at a record low, and earnings are now growing faster than inflation (1.2% per year in real terms). 

A line chart showing % change in average earnings along with inflation. Since late 2018 average earnings have been growing faster than inflation. In July 2019, earnings increased by 4% and inflation was 2.1%

About the author: Philip Brien is a Senior Library Clerk at the House of Commons Library, specialising in public spending.