UK GDP falls: A weak economy has been dragged under by the end of free COVID testing | Business News

Here is a tale of two economies.

One of these countries is doing pretty badly. Gross domestic product (GDP) – the most comprehensive measure of national income – has fallen by 0.4 percentage points since the start of the year.

As a result, it looks perilously close to a technical recession, or at the very least a period of contraction.

The second of these countries is actually seeing its economy grow.

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Indeed, in contrast to that other one, this country’s GDP has grown by 1.3% so far this year. This is hardly anything to celebrate: it’s a weaker growth rate than one would have expected at this point, but then again the rest of the world is also facing a cost of living squeeze and all sorts of supply chain problems deriving from both COVID and record energy prices.

Except here’s the thing: both of these economies are the same place: the UK.

Today we learnt that headline gross domestic product fell in April – not just a little but a lot: 0.3%. Given economists had expected growth of about 0.1%, this is a real disappointment.

And it follows a fall in March, meaning that, all told, we are about 0.4% poorer than we were in January.

But as you may recall, since the pandemic these GDP figures have included a measure of how much COVID testing and vaccination has been taking place in this country. This makes plenty of economic sense, given the programme is enormously expensive – over £15 billion in the past year.

And this has actually lifted the headline figures in certain months, depending on how much testing and vaccinating has been going on. Consider: last March headline GDP rose by 2.7%. But were it not for the extraordinary amount of testing and vaccinating the UK was doing, it would only have been growth of 2%.

But now the testing programme has been scaled back, and April, it so happens, was the month free testing came to an end in England. And this, it turns out, was the main explanation for the fall in GDP that month.

According to the Office for National Statistics, which calculates these figures, the ending of free testing actually knocked 0.5 percentage points off GDP growth in April. Adjust for this and after rounding errors the UK economy excluding Test & Trace and vaccinations grew by 0.1% in January.

Since January it has grown by 1.3%, not fallen.

In other words, while you might have thought, on the basis of today’s headline figures, that this is yet more evidence that Britain is slumping towards a cost of living recession, that’s not quite the right story. In fact the proximate explanation for today’s fall is something far more technical.

But here’s where things get a bit complicated, because none of this is to say that the economy won’t face a recession later this year.

All those factors which have been well covered in recent months – the cost of living crisis, the rise in energy prices to record levels, increased taxes, strains on businesses as they continue to adjust to the change in trading conditions following Brexit – continue to have an effect on the economy.

Consumer confidence has fallen to record lows and interest rates are rising, all of which is pointing towards weaker demand towards the end of this year.

But, as I say, the main explanation for April’s weak GDP is somewhat more prosaic: overall, the economy was pretty weak but was dragged into comfortably negative territory by the end of free COVID testing.

On top of this confusion, we also have to contend with the statistical impact of an extra bank holiday for the Queen’s jubilee in June.

This will mean GDP will almost certainly contract in the second quarter as a whole, but will potentially bounce back in the third quarter.

Former Bank of England governor Mervyn King used to talk occasionally about “statistical fog” making it tricky to see what was really happening in the economy. We seem to be in a spell of statistical fog right now.