Yahoo Finance UK economy grows more than expected but household savings drop
The UK economy grew at a faster pace than first thought in the final three months of 2021 as higher health spending masked the inflation hit to household incomes.
The UK economy grew at a rate of 1.3% towards the end of last year, with GDP now just below pre-pandemic levels, according to the Office for National Statistics (ONS).
Read more: One in three households turning down heating amid cost of living crisis
The official statistics body had previously estimated GDP grew by 1% in the final months of last year.
Darren Morgan, director of economic statistics at the ONS said: “GDP grew a little stronger than we first thought in the fourth quarter.”
The ONS said the largest contributors to the increase came from human health and social work activities.
This was driven by increased visits to doctors at the start of the quarter, as well as a large increase in coronavirus testing and tracing and the extension of the vaccination programme.
The country was hit by the Omicron wave of COVID cases in those last three months of 2021.
But the recent economic growth comes amid a cost of living crisis, driven in large part by rising household bills.
In a sign of the impact of rising prices, household savings fell to their lowest since the start of the pandemic, with the ratio at 6.8% in the fourth quarter. That is down from 7.5% in the previous quarter and the lowest since the start of the pandemic.
“Savings were at their lowest level since the start of the pandemic as household spending rose, mainly driven by rising prices,” Morgan added.
The ONS said gross domestic product (GDP) is now 0.1% below where it was before the pandemic.
Read more: Cost of living crisis: Low-income households set to lose £850 of spare cash
But revisions to GDP figures for the past two years means the economy increased by 7.4% in 2021 – still a record rebound, but lower than the 7.5% initial estimate.
Paul Dales, senior UK economist at Capital Economics, said: The upward revision to GDP growth in Q4 of last year may not be as encouraging as it looks as a lot of it appears to be due to inventories while consumer spending was revised down. The latter suggests the squeeze on real incomes is starting to bite, although the fall in the saving rate is providing a cushion.”
Jonathan Andrew, CEO of Bibby Financial Services, added: “Today's figures on the health of the economy won't feel like a 'win' for small businesses who are living and breathing the reality of rising costs which are undermining their livelihoods – and could spell catastrophe for some in 2022. Indeed, while the festive season and return to normality prompted a boost in seasonal trading and business confidence, this uplift masks the true picture.”
“While the chancellor’s decision to cut National Insurance bills for employers by increasing the employment allowance will benefit some SMEs, without further immediate support, we risk genuinely undermining these crucial businesses and people and communities behind them. The government now needs to heed the concerns of SMEs across the country quickly and consider wider tax cuts and energy grants to help SMEs overcome challenges associated with rising inflationary pressures.”
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