Britain may be poised to avoid a recession altogether after growth beat expectations in January, despite a backdrop of stubbornly high inflation, industrial action and rising interest rates.
Attention now turns to next week’s spring budget with Chancellor Jeremy Hunt now armed with better than expected economic data and therefore potentially greater flexibility to trigger growth-boosting policies.
But markets are also closely watching the Bank of England’s intentions ahead of the March 23 monetary policy committee meeting, when it is expected to raise its key rate another 25 basis points to 4.25%.
Better than expected economic data leaves Chancellor Jeremy Hunt more options
UK GDP rose 0.3% in January, following a 0.5% plunge in December and beating expectations of 0.1%, new data from the Office for National Statistics showed on Friday.
Education, transport, health and arts and entertainment were the main drivers of growth, while a significant improvement was observed in the services sector with an increase of 0.5% against a decrease of 0 .8% in December.
Orla Garvey, senior fixed-income portfolio manager at Federated Hermes, said the service hike was a “partial resolution” to lost production from the fallout from the December industrial action “but did not make up for any the fall”.
“It doesn’t change the bigger picture that UK GDP is down and underperforming compared to other developed market peers,” she said.
The UK economy stagnated in the last three months of the year, having shrunk 0.3% in the previous quarter.
“The data is already stale at this point and won’t move the market today,” Garvey said.
“More important for markets is next week’s spring statement and US CPI data.”
The return of Premier League football helped boost GDP growth by 0.3% in January
The Bank of England is expected to raise its key rate to 4.25% later this month
Developed markets economist at ING James Smith said that despite weakness in areas such as construction and manufacturing, there is a growing chance that Britain will avoid a technical recession – two quarters of contraction consecutive – in total.
He added: ‘[However] this is quite a moot point, given that even if it did happen, the depth of a recession would likely only be on the order of a few tenths of a percentage point.
New data on UK growth forecasts will be released next week, but figures released by the UK Treasury in February suggest the city expects GDP to contract by 0.3 and 0.4 % in the first and second quarters of 2023, respectively, with the economy contracting by 0.8% in total for the year.
The February forecast suggests the city expects GDP to contract 0.3 and 0.4% in the first and second quarters of 2023
The Office for Budget Responsibility is more pessimistic, forecasting consecutive declines of 0.5% in the first two quarters and an overall contraction of 1.4% in 2023.
In February, the Bank of England also cut its recession forecast from 3% in 2023 to just 1%, due to falling wholesale energy prices.
Mazars chief economist George Lagarias said economic data has improved since the February forecast.
He said: “We can’t really say we’re too surprised that UK GDP growth beat expectations for January.”
“On the one hand, consumers have been stronger than expected as tight employment conditions mean that wage growth is somewhat catching up with inflation. In addition, external demand from major global economies, such as the United States and China, has been stronger than expected.
The better-than-expected data bolsters optimism ahead of next week’s spring budget, potentially offering chancellor Hunt the chance to push through policies designed to boost growth.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: ‘While public finances are not in their best shape following colossal Covid spending and lately cost of living support measures, they are well. better than expected.
“The government borrowed £117billion in the financial year to January 2023, £7billion more than in the same period a year earlier, but £30billion (at constant scope) less than the OBR forecast in November 2022.
“The unexpected budget surplus is both a blessing and a curse for the government. It expands the government’s options when it comes to decisions about taxation and spending – but it won’t stop public sector appeals about pay rises amid the cost of living pressure on finances.
Public sector wage demands have become a contentious issue, with BoE Governor Andrew Bailey among those calling for restraint in efforts to avoid triggering a wage-price spiral.
Modupe Adegbembo, G7 Economist at AXA Investment Managers, said: “We continue to expect the MPC to rise 25 basis points at their next meeting on March 23, taking the Bank Rate to 4.25. %, where we expect them to pause.
“BoE Chief Economist Huw Pill recently noted improving data “suggesting that current momentum in economic activity may be slightly stronger than expected,” a sign that the tightening is not yet ended.
“We see the risks on the upside – the BoE could raise rates further if the labor market does not moderate further, although the upcoming labor market data and CPI inflation in the weeks to come will be more relevant in this regard.”
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