The UK economic system stagnates in February on account of strikes and inflation

LONDON – The UK economy stagnated in February as widespread industrial action and persistently high inflation slowed activity.

Thursday’s data showed stable GDP in February, missing consensus expectations of 0.1% growth. Both the service and manufacturing sectors contracted, partially offset by a record 2.4% expansion in construction.

This followed an upwardly revised GDP expansion of 0.4% in January, meaning production rose 0.1% in the three months to the end of February.

Large-scale strikes have been staged in recent months by teachers, doctors, civil servants and railroad workers, among others — members of the sectors most contributory to February’s contraction in service output.

“There was anecdotal evidence reported in the results of the monthly business surveys suggesting that industrial action had a notable impact across industries to varying degrees in February 2023,” the Office for National Statistics said on Thursday.

“This included healthcare (nurses and emergency services), public services, education (teachers and professors) and the rail network.”

Jeremy Hunt, Britain’s Chancellor of the Exchequer, holds the dispatch box while standing with colleagues from the Treasury outside 11 Downing Street in London, Britain.

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Responding to the figures, UK Finance Secretary Jeremy Hunt insisted the country’s prospects were “better than expected” and stressed that Britain “will avoid a recession thanks to the measures we are taking,” according to multiple news outlets.

The independent Office for Budget Responsibility no longer expects the UK economy to enter a technical recession – defined as two consecutive quarters of contractions – in 2023. The country’s budget situation received a significant boost from falling gas prices.

This allowed Hunt to announce further fiscal support in its spring budget, which the Bank of England says will boost GDP by about 0.3% over the coming years, even though the UK tax burden remains at a 70-year high.

Recession fears ‘likely to haunt Britain for some time’

Economists broadly don’t share Hunt’s optimism as the central bank continues to hike interest rates aggressively to stem persistently sky-high inflation, which unexpectedly rose to 10.4% a year in February.

Suren Thiru, economics director at ICAEW, said Thursday’s GDP figures “suggest the economy has lost momentum as skyrocketing inflation and strikes continue to weigh on key drivers of UK GDP, particularly services and industrial production.”

“Recession fears are likely to haunt the UK for some time to come as rising incomes from slowing inflation and lower energy bills will be largely offset by rising taxes and the lagged impact of interest rate hikes,” Thiru added.

Charles Hepworth, investment director at GAM Investments, said that Hunt’s claim that the economic outlook is looking better was “quite a suspension of disbelief” given the circumstances.

“Labour strikes were the main cause of sluggish growth in the UK over the month. There were ongoing strikes in March and no decline in April, so we’re likely to continue to see the dampening impact on any growth,” Hepworth said.

LONDON, ENGLAND – JANUARY 16: Protesters from a number of different trade unions take part in a rally against the UK Government’s plans to limit the ability of public sector workers to strike, and are marched outside Downing Street on January 16, 2023 in London, England , seen. (Photo by Guy Smallman/Getty Images)

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PwC senior economist Barret Kupelian noted that the prevalence of strikes in large sub-sectors of the economy means the UK is “likely to see a stop-start picture going forward”, consistent with the monthly fluctuations in output.

“The big picture is that today’s release combined with the revisions in economic activity brings the three-month growth rate to around 0.1%,” Kupelian said. “The economy continues to stagnate and economic activity is struggling to grow above pre-pandemic levels.”

The UK has now recovered to its pre-Covid production levels, the ONS confirmed, becoming the latest major economy to do so. Economists have cited several unique factors driving this inertia, such as: B. Trade losses related to Brexit and high levels of economic activity due to the prevalence of long-term illnesses.

Much of the population remains mired in a cost-of-living crisis as inflation continues to far outpace wage growth, raising the risk of further industrial action.

“With real incomes still falling, households facing significantly higher tax bills this year and interest rates expected to continue rising, it’s hard to see where any meaningful recovery in growth will come from and the stagnant picture painted today numbers looks very much like this will be the norm for the foreseeable future,” said Stuart Cole, chief macro economist at Equiti.

Bottom of the G-20 table

In its World Economic Outlook released Tuesday, the International Monetary Fund forecast Britain’s GDP to contract by 0.3% in 2023, making it the worst performer in a G-20 (Group of Twenty) that includes the warring belongs to Russia.

The UK economy is expected to miss Hunt’s two key fiscal rules – a falling public debt burden and keeping lending rates below 3% of GDP – over the next five years.

Offering a rosier medium-term outlook than its own previous estimates, the IMF now forecasts annual GDP growth of 1% in 2024, rising to 1.5% in 2028 — although that’s well below the OBR forecast, the Hunts Budget commitments based.

The IMF forecasts that the budget deficit will reach 3.7% of GDP by 2028, compared to just 1.7% forecast by the OBR.

Responding to Tuesday’s IMF forecasts, Hunt stressed that the UK’s growth forecasts had been “upgraded by more than any other G-7 country”.

“The IMF is now saying that we are on the right track for economic growth. If we stick to the plan, we will more than halve inflation this year and ease the pressure on everyone,” he added.

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