UK financial system rebounds with stronger than anticipated January GDP print

City workers at Paternoster Square, where the headquarters of the London Stock Exchange is located, in the City of London, Britain, on Thursday March 2nd, 2023.

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LONDON – The British economy grew 0.3% in January, official figures showed on Friday, beating expectations as it continues to fend off what economists see as an inevitable recession.

Economists polled by Reuters had forecast a 0.1% monthly increase in GDP. GDP was flat in the three months to the end of January, the Office for National Statistics said.

“The services sector grew by 0.5% in January 2023, after declining by 0.8% in December 2022, with the largest contributors to growth in January 2023 being education, transportation and storage, human health activities and arts, entertainment and leisure activities. who have all recovered from falls in December 2022,” the ONS noted.

Manufacturing output fell 0.3% in January after growing 0.3% in December, while construction fell 1.7% in January after flat in the previous month.

The UK economy showed no growth in the last quarter of 2022, narrowly avoiding a recession – commonly defined as two quarters of negative growth – but contracted by 0.5% in December.

The UK remains the only country in the major economies of the G-7 (Group of Seven) that has yet to fully recover production lost during the Covid-19 pandemic. The ONS said on Friday that monthly GDP is now an estimated 0.2% below pre-pandemic levels.

Both the Bank of England and the Office for Budget Responsibility have forecast a five-quarter recession from the first quarter of 2023, but data so far has beaten expectations.

Despite better-than-expected January numbers, economists still generally believe activity is on a downtrend as high inflation weighs on household incomes and business activity.

UK inflation slowed to 10.1% yoy in January and continued to shrink after hitting a 41-year high of 11.1% in October, but remained well above the Bank of England’s target of 2%.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the “modest” rebound in January suggests the economy is still on a “weaker path”.

“We are likely to continue flirting with recession for much of 2023 as high inflation, tax hikes and the lagged effect of rising interest rates reduce consumer spending power, despite a boost from energy cost cuts,” Thiru said.

Treasury Secretary Jeremy Hunt is due to present the government budget on Wednesday and is expected to announce further measures to deal with the country’s cost-of-living crisis.

“The spring budget could have a significant impact on the UK’s near-term growth prospects. While extending energy support will bring some relief to struggling households, aggressive tax hikes would risk sapping any sustained momentum from the economy,” Thiru said.

Tom Hopkins, portfolio manager at BRI Wealth Management, noted that the monthly figures are difficult to read at the moment given the distortions over the past six months – such as Queen Elizabeth II’s funeral and the World Cup – which have in part impacted consumer services.

“The underlying trend in the economy appears to be a gradual decline, thanks in part to an ongoing downward trend in retail spending,” he said. “We expect a technical recession in the UK in the first half of this year, albeit one that is not as bad as first feared.”

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