What is GDP?

GDP (gross domestic product) is a measure of all the economic activity of companies, governments and people in a country and is used to indicate the health of that economy.

It is calculated either by adding up the value of all the goods and services produced, or by value of all the income earned in a country over a specific period.

When you hear about economic growth in the news this typically refers to GDP growth. An annual GDP growth rate of 2%, then, simply means that the economy has grown by 2% over the past year.

GDP doesn't tell the whole story. For example, it doesn’t tell you whether people’s living standards are increasing, it doesn't consider whether the growth is environmentally sustainable, or whether people’s wellbeing have improved.

How does GDP affect people and businesses?

If GDP goes up a lot, people are likely to be earning and spending more and businesses are more likely to increase recruitment and investment. People and firms pay more in tax because they're earning and spending more, providing more money for the government to spend on public services.

Conversely, if GDP growth is weak or falling, companies are more likely to cut jobs, people earn and spend less, leaving them feeling worse off. Governments tend to generate less tax revenue, which means they may decide to cut public spending or raise taxes.

What is the state of play in June 2024?

While the UK recently exited a technical recession (defined as at least two consecutive quarters of negative economic growth), the longer-term trend remains anaemic with UK GDP in annual terms persistently growing below the historic average of 2.3%. Compared to Q4 2019 (the last full quarter before the pandemic), UK GDP growth is the second lowest in the G7 (see Chart 1).

UK GDP per head – a better measure of change in living standards – has grown by an average of just 0.4% a year since the global financial crisis (see Chart 2), compared to an average of 2.4% year over the 50 years that preceded the crisis.

What is the outlook for UK GDP?

The OBR (Office for Budget Responsibility) expects the UK economy to grow by 0.8% in 2024. The OBR then expects GDP growth will be 1.9% in 2025 and 2.0% in 2026.

The UK’s growth in the near-term will partly be determined by the extent to which the boost to people’s incomes from weaker inflation is curtailed by caution to spend and invest, amid a weakening labour market and high interest rates.

Some of the main challenges facing UK GDP

• Poor Productivity lowers potential output and weakens the resilience of an economy.
• Low labour supply stunts GDP by stifling firms’ ability to produce goods and services.
• Anaemic investment limits future GDP growth by restraining innovation and productivity.
• Restrictive economic policy including the squeeze on households’ and firms’ finances from high interest rates.
• External shocks (for example, COVID-19, Russia’s invasion of Ukraine, Brexit) that cause short- and long-term barriers to GDP growth.