Strong exports keep the UK economy out of recession

The UK economy grew by 0.5 per cent in the first quarter of the year, according to the second GDP estimate (pdf) released by the Office for National Statistics (ONS) today. After adjusting for ‘snow effects’, output in the first quarter was unchanged from its level in the third quarter of 2010.

According to the ONS’s figures, household spending fell by 0.8% in real terms over the last two quarters and investment spending dropped 6.2%.

Total domestic spending fell by 1.3% – and it would fallen by more had not government spending increased by 1.4%. This fall in domestic spending can be attributed to two factors.

First, surveys suggest the announcement of the government’s tax and spending plans for the next four years has had a negative effect of consumer and business confidence. Worries about the effect of tax increases and spending cuts on the economy have probably already led to some cutbacks in spending plans.

Second, higher food and energy prices – at a time when wages are only increasing at a very moderate pace – have squeezed households’ ability to spend on other goods and services.

The positive news is that net trade is filling some of the gap caused by declining domestic spending. In part, this is because demand for imports has weakened alongside the drop in domestic spending.

Imports were, however, still up 0.8% over the last two quarters. The bigger effect comes in the form of an export boom. Exports are up 5.5% in real terms over the last two quarters and 10.4% in the last year.

The government has said it wants to rebalance the economy away from debt-funded domestic spending and towards exports. The export side of this shift is progressing well and lending figures show that increases in debt across the economy are modest.

The problem is that confidence is low and real incomes are contracting, so households and businesses are now reducing their spending.

This was not part of the plan. Increased certainty about the public finances was supposed to lead to increased confidence and more spending. Instead, greater uncertainty about the economic outlook – and some bad luck with global commodity prices – has led to reduced confidence and less spending. Were it not for the export boom, the UK would now be back in recession.