How fast is the UK's economy growing and what is GDP?

According to the latest official data, the UK economy unexpectedly shrank by 0.1% in January. This figure marks an economic slowdown following a growth of 0.4% in December, indicating potential instability. The data suggests a need for caution regarding the UK's economic trajectory in the near term.

The strength of the economy directly impacts many aspects, such as wage growth for workers and tax revenue for the government to use for public services. Gross Domestic Product (GDP) is a measure of all economic activity within a country by companies, the government, and individuals. Understanding GDP is crucial for evaluating a nation's overall financial health and future prospects.

In the UK, the Office for National Statistics (ONS) publishes new GDP data every month. However, quarterly data, which covers three months, is generally considered more important. Most economists, politicians, and businesses want to see steady GDP growth, as this usually means people are spending more, creating more jobs, paying more taxes, and workers are experiencing better wage growth. This positive cycle is essential for sustained economic prosperity.

If GDP falls for two consecutive quarters, it is known as a recession, which can lead to wage freezes and unemployment. In the first half of 2024, the UK economy grew strongly, as it rebounded from a brief recession at the end of 2023. GDP grew by 0.7% from January to March and by 0.5% from April to June. This rebound showcased the economy's resilience but also highlighted its vulnerability to downturns.

However, economic growth has slowed since then. In January of this year, the construction industry and oil and gas extraction performed weakly, but this was partially offset by increased consumer spending. The government has made economic growth a key political priority. However, the Bank of England has halved its growth forecast for the coming year. In February, the Bank said it expected the economy to grow by 0.75% in 2025, down from its previous forecast of 1.5%. This downward revision reflects concerns about future economic performance.

The Bank of England is concerned that inflation in the UK will be affected as employers face higher wage and national insurance costs, and consumers face higher energy and water bills. U.S. trade tariffs may also push up prices. The Office for Budget Responsibility (OBR) is also expected to lower its forecasts for the UK's economic health in the coming years on March 26th. These factors collectively pose challenges to maintaining stable prices and economic growth.

If GDP grows steadily, people pay more taxes because of increased income and spending. This means the government has more money and can choose to spend it on public services such as schools, police, and hospitals. When the economy shrinks and falls into recession, these situations can reverse. Governments often reduce tax revenue, which means they may decide to freeze or cut public spending, or raise taxes. These measures can significantly impact public services and individual finances.

GDP can be measured in three ways: output, which is the total value of goods and services produced by each sector of the economy (agriculture, manufacturing, energy, construction, services, and government); expenditure, which is the value of goods and services purchased by households and the government, investment in machinery and buildings, and the value of exports minus the value of imports; and income, which is the value of income generated, mainly reflected in profits and wages. In the UK, the Office for National Statistics (ONS) publishes a single GDP measure that is calculated using all three measurement methods. This comprehensive approach aims to provide a balanced view of economic activity.

The UK is one of the fastest countries among major economies to estimate GDP, publishing it approximately 40 days after the relevant quarter. At this stage, only about 60% of the data is available, so the figure is revised as more information becomes available. More relevant information is available on the Office for National Statistics (ONS) website. These revisions are important to consider when interpreting GDP data.

There are some limitations to GDP data: unpaid work, such as caring for children or elderly relatives, is not included; GDP growth may simply be due to the richest people becoming richer, rather than everyone becoming better off, and some people may become worse off; if the population is also growing, GDP growth may still mean less money per person, which may reduce people's living standards. Some critics also argue that GDP does not take into account whether the economic growth it measures is sustainable, or the environmental damage it may cause. Alternative measures have been developed to try to capture this. These alternative metrics aim to provide a more holistic assessment of societal well-being and environmental sustainability.