UK economy rebounds with stronger-than-expected January GDP print

The U.K. economy grew by 0.3% in January, official figures showed on Friday, exceeding expectations as it continues to fend off what economists see as an inevitable recession.

Economists polled by Reuters had projected a 0.1% monthly increase in GDP. GDP was flat over 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 falling by 0.8% in December 2022, with the largest contributions to growth in January 2023 coming from education, transport and storage, human health activities, and arts, entertainment and recreation activities, all of which have rebounded after falls in December 2022,” the ONS found.

Production output fell by 0.3% in January after growing 0.3% in December, while the construction sector dropped 1.7% in January after flatlining the previous month.

The U.K. economy showed no growth in the final quarter of 2022 to narrowly avoid a recession — commonly defined as two quarters of negative growth — but shrunk by 0.5% in December.

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

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

Despite the better-than-expected January print, economists still broadly believe activity is on a downward trajectory, as high inflation eats into household incomes and business activity.

U.K. inflation slowed to an annual 10.1% in January, continuing to shrink after hitting a 41-year high of 11.1% in October but staying well above the Bank of England’s 2% target.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said that the “modest” January rebound suggests the economy is still on a “downbeat path.” “We’re likely to continue flirting with recession throughout much of 2023, as high inflation, tax rises and the lagged effect of rising interest rates shrinks consumer spending power, despite a boost from easing energy costs,” Thiru said.

Finance Minister Jeremy Hunt will deliver the government’s budget on Wednesday and is expected to announce further measures to manage the country’s cost of living crisis. “The Spring Budget could have a significant impact on the U.K.’s near-term growth prospects. While extending energy support will provide some relief to struggling households, aggressive tax rises would risk eliminating any lingering momentum from the economy,” Thiru said.

Tom Hopkins, portfolio manager at BRI Wealth Management, noted that monthly figures are difficult to read at the moment, given distortions over the last six months — such as the funeral of Queen Elizabeth II and the World Cup — which partially affected consumer services.

“The underlying trend in the economy appears to be one of gradual contraction, thanks in part to an ongoing downtrend in retail spending,” he said. “We’re expecting a technical recession in the UK in the first half of this year, albeit one that’s not as bad as first feared.”