UK economy grew beyond pre-pandemic size before Omicron hit

The UK economy grew to above its pre-pandemic level for the first time in November, supported by increasing momentum across all industries before the Omicron coronavirus variant hit the country.

Output rose 0.9 per cent between October and November, accelerating strongly from near-stagnation in the previous month, according to data from the Office for National Statistics. This was much higher than the 0.4 per cent forecast by economists polled by Reuters and the highest rate since June.

The increase took gross domestic output, or GDP, to 0.7 per cent above its level in February 2020, before the first Covid-19 restrictions, indicating that the economy had fully recovered the ground lost during the pandemic.

Grant Fitzner, ONS chief economist said: “The economy grew strongly in the month before Omicron struck with architects, retailers, couriers and accountants having a bumper month.”

He added that construction also recovered from several weak months as many raw materials became easier to obtain.

Dean Turner, economist at UBS Global Wealth Management, said the much stronger than expected GDP data showed that the UK economy was “in good shape as it entered into the latest wave of the pandemic”.

However, the trend is expected to be reversed in December following a surge in Covid-19 infections and self-isolations linked to the spread of Omicron.

“GDP almost certainly dropped in December, as households hunkered down in response to the Omicron variant,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

November’s data show that growth was boosted by strong consumer demand and easing supply chain disruption for manufacturers and the construction industry.

Services, which account for about 80 per cent of the economy, grew 0.7 per cent, supported by strong growth in professional, scientific and technical activities. The retail, courier and warehousing sectors also expanded, driven by stronger than usual Black Friday sales and the build-up to Christmas. Accommodation, arts and entertainment all performed well.

Manufacturing also recorded strong growth, of 1.1 per cent, with output increasing in most sectors, including car production where manufacturers reported improvements in sourcing parts.

Construction rebounded by 3.5 per cent, the fastest monthly rise since March. This was supported by strong new private housing activity, with builders suggesting some of the issues in sourcing products over recent months had eased.

UK goods exports continued to underperform other countries’ performance, contracting 1 per cent between October and November. In contrast, imports were boosted by strong domestic demand.

The ONS said that if there were no other data revisions, GDP for the fourth quarter would either reach or surpass its pre-coronavirus level of the last quarter of 2019, provided the monthly December 2021 estimate did not fall by more than 0.2 per cent.

In the third quarter, UK output was still 1.5 per cent below its pre-pandemic level, a larger gap than any other G7 country. In the US, the economy recovered from the hit of the health crisis in the second quarter.

Some economists said they expected the recovery to quickly regain momentum after the Omicron wave. Turner said Omicron’s impact on the economy would be “less devastating” than previous waves and predicted the economy would “recover reasonably swiftly” from January.

The trend, together with high inflation “will keep the Bank of England in a hawkish mood, with further [interest rate] hikes likely in the months ahead”.

But, Yael Selfin, economist at KPMG UK, warned that “rising taxes and borrowing costs, as well as elevated inflation, will squeeze households’ purchasing power”, weighing on growth.