- UK GDP jumps 0.3% m/m in January as services recover
- Better-than-expected data leaves chancellor with more options
- The Bank of England is expected to continue raising 25 basis points to 4.25%.
The UK may well avoid a recession after growth beat expectations in January despite persistently high inflation, strikes and rising interest rates.
Now attention is turning to next week’s spring budget, with Chancellor Jeremy Hunt now armed with better-than-expected economic data and therefore potentially more flexibility to implement growth-stimulus policies.
But markets are also keeping a close eye on the Bank of England’s intentions ahead of the Monetary Policy Committee meeting on March 23, when the base rate is expected to rise another 25 basis points to 4.25%.
Better-than-expected economic data leaves Chancellor Jeremy Hunt with more options
UK GDP rose 0.3% in January after falling 0.5% in December and beat expectations of 0.1%, fresh data from the Office for National Statistics showed on Friday.
Education, transport, healthcare, arts and entertainment were key drivers of growth, while the services sector saw a significant improvement, up 0.5% from a 0.8% drop in December.
Orla Garvey, senior fixed income portfolio manager at Federated Hermes, explained that the surge in services was a “partial recovery” of lost production due to the impact of the December strike, “but did not make up for the entire fall.”
“This does not change the overall picture that UK GDP is on a downward trend and lags behind other developed markets,” she said.
The British economy has not changed in the last three months of the year, shrinking by 0.3% in the previous quarter.
“At this point, the data is outdated and will not impact the market today,” Garvey said.
“More important for the markets is next week’s spring announcement and US CPI data.”
The return of football to the Premier League contributed to GDP growth of 0.3% in January.
The Bank of England is expected to raise its base rate to 4.25% later this month.
ING’s developed markets economist James Smith said that despite weakness in areas such as construction and manufacturing, there is a growing chance Britain will avoid a technical recession altogether – a two-quarter contraction in a row.
He added: ‘[However] this is a rather moot point, given that even if it does, the depth of the recession is likely to be only on the order of a few tenths of a percent.”
Updates on UK growth forecasts are due next week, but figures released by the UK Treasury in February suggest the city expects GDP to contract by 0.3 and 0.4 percent in the first and second quarters of 2023 respectively, and the economy will shrink by 0.8% in general for the year.
February forecasts suggest that the city expects GDP to contract by 0.3 and 0.4 percent in the first and second quarters of 2023.
The Office of Financial Responsibility is more pessimistic, forecasting a 0.5% sequential fall in the first two quarters and a 1.4% overall contraction in 2023.
In February, the Bank of England also lowered its recession expectations from 3% in 2023 to 1% as a result of falling wholesale energy prices.
Mazars Chief Economist George Lagarias explained that economic data had improved from February’s forecasts.
He said: “We can’t say we’re too surprised that UK GDP growth beat expectations in January.
“On the one hand, consumers are stronger than previously expected as tight employment conditions mean wage growth is catching up with inflation to some extent. In addition, external demand from major global economies such as the US and China has been stronger than expected.”
Better-than-expected data is boosting optimism ahead of next week’s spring budget, potentially giving Chancellor Hunt a boost in growth-stimulating policies.
Myron Jobson, Senior Personal Finance Analyst at Interactive Investor, said: “While public finances are not in the best shape following the massive Covid spending and recent cost-of-living support measures, they are much better than forecast.
“The government borrowed £117bn in the fiscal year to January 2023, £7bn more than in the same period of the previous year, but £30bn (on the same basis) less than the OBR forecast in November 2022 of the year.
“An unexpected budget surplus is both a blessing and a curse for the government. This empowers the government when it comes to tax and spending decisions, but doesn’t stop the public sector from calling for higher wages in the face of the cost-of-living financial crisis.”
Public sector wage requirements have become a contentious issue, with Bank of England Governor Andrew Bailey among those calling for restraint in efforts to avoid a wage-price spiral.
Modupe Adegbembo, G7 Economist at AXA Investment Managers, said: “We still expect the MPC to rise by 25 basis points at their next meeting on March 23rd, bringing the bank rate to 4.25%, where we expect them to pause.
Bank of England Chief Economist Hugh Pill recently noted an improvement in data “suggesting that the current momentum in economic activity may be slightly stronger than expected”, indicating that the tightening is not over yet.
“We see risks leaning higher – the Bank of England could raise rates even more if the labor market does not continue to moderate, although the upcoming labor market and CPI inflation data in the coming weeks will be more relevant in this regard.”
Credit: www.thisismoney.co.uk /