(Bloomberg) -- The UK economy grew more slowly than thought in the second quarter, suggesting the recovery from recession was already losing steam as Labour came to power.
Gross domestic product rose 0.5%, the Office for National Statistics said on Monday, a downgrade from its previous estimate of 0.6%. It follows growth of 0.7% in the first quarter. Economists had expected no revision.
The figures are a blow for Prime Minister Keir Starmer, who is counting on fast growth to help deliver the improvements to public services promised to voters. Starmer has pledged to lift growth to 2.5%, well above the levels seen since the financial crisis and the rate expected by forecasters in the coming years.
“The economy will probably slow a little further in the second half of the year,” said Thomas Pugh, economist at RSM UK. “But the composition of growth should be healthier with household consumption and business investment driving growth rather than government spending.”
There are further signs that the economy has lost momentum since Labour took office in July, in part due to its own warnings about the state of the public finances.
Output flatlined in July for the third time in four months and confidence is weakening amid fears that Chancellor Rachel Reeves will announce tax rises and spending cuts in her budget on Oct. 30 to fill what she claims is a black hole left by the Conservatives. Recent surveys point to the economy slowing to growth of around 0.3% a quarter.
The National Accounts incorporated historic revisions as well as the first reweighting of the relative size of each sector since the pandemic. The economy grew 0.3% last year, more than the 0.1% previously estimated, but the second half of the year was still in a shallow recession.
Markets were little changed following the release with the pound holding a 0.1% gain versus the dollar at $1.3388.
The ONS said the saving ratio, the amount of disposable income that people choose not to spend, rose to 10%, the highest since 2021. That’s despite real disposable income per head rising 1% over the quarter, as wages outstripped inflation.
It suggests consumers remain cautious after a rocky few years for the economy when their finances were squeezed by double-digit inflation and high interest rates. The hope is that falling interest rates and a stable economic outlook encourage consumers to spend rather than save.
The UK stands in stark contrast to the US, where the willingness of consumers to run down precautionary savings has powered the strongest economic growth in the G-7. US consumer spending is now around 13% above its pre-pandemic levels. In the UK, it remains just 1% above, leaving Britain close to the bottom of the G-7 growth league over the past five years.
Paul Dales, chief UK economist at Capital Economics, said the savings ratio “remains high by historical standards,” a potential boost to growth ahead if it drops closer to normal levels.
“While higher taxes are one downside risk to consumer spending, a fall in the saving rate is an upside risk,” he said.
The weakening in the recovery from last year’s recession may ease concerns at the Bank of England that fast growth would fan inflation, as it starts to cut interest rates.
While Britain’s 1.2% expansion was still the fastest in the G-7 in the first half of 2024, figures taking into account faster population growth suggest a slower underlying economic performance. GDP per head is still 0.3% below levels seen a year earlier.
The ONS said that a 0.6% jump in output from the services sector drove the growth in the second quarter, offsetting falls in both production and construction.
Business investment jumped 1.4%, revised up from the previous estimate of a 0.1% fall, as spending on transport equipment and intellectual property products climbed. Growth in household consumption was unrevised at a meager 0.2%, and the increase in government spending was downgraded.
Separate figures showed the current-account deficit excluding precious metals, the difference between money leaving the UK and money coming in, widened to £22.4 billion ($30 billion) in the second quarter — equivalent to 3.2% of GDP. A £8.2 billion jump in goods imports drove the deteriortion, particularly in commodities such as finished manufactured goods and oil.
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