UK economy grows faster than first thought but contraction looms

The UK economy grew faster than first thought at the end of last year, but experts warn the tightening cost of living squeeze could plunge the country into a recession.

In the three months to December, the economy grew 1.3 per cent, higher than first estimated by the Office for National Statistics, according to final calculations released today.

However, high inflation, which started taking off in the second half of 2021, eroded real incomes 0.1 per cent over the quarter.

Households dipped into their savings to maintain spendings amid a fall in their living standards.

The UK’s savings rate dropped to 6.8 per cent from 7.5 per cent. Economists have banked on Brits running down their pandemic-induced savings to drive economic growth this year. 

However, a sharp fall in confidence may deter people from raiding their savings accounts.

“No one should rule out a decline in households’ real expenditure this year that could drag the overall economy into a recession,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.

Pantheon is forecasting GDP to contract 0.3 per cent in the second quarter of this year.

Research by GfK found households’ optimism shrank to minus 31 this month, levels in the early 1990s, 2008 and 2020, periods all marked by recessions.