Britain could completely avoid recession after growth beat expectations in January, despite a backdrop of stubbornly high inflation, union 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 potentially more flexibility to unleash growth-enhancing 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 key rates are expected to be raised by a further 25 basis points to 4.25% .
Better-than-expected economic data gives Chancellor Jeremy Hunt more options
UK GDP ticked 0.3 percent higher in January, following a 0.5 percent slump in December, beating expectations of 0.1 percent, new data from the Office for National Statistics showed on Friday.
Education, transport, health care and arts and entertainment were the main drivers of growth, while the services sector showed a significant improvement with an increase of 0.5 percent from a decline of 0.8 percent in December.
Orla Garvey, senior portfolio manager of fixed income at Federated Hermes, explained that the uptick in the services sector was a “partial reversal” of lost output due to the fallout from December’s industrial action, “but has not made up for all of the decline” .
“This does not change the bigger picture that UK GDP is on a downward trend and underperforming compared to other developed peers,” she said.
The British economy leveled off in the last three months of the year, having contracted by 0.3 percent in the previous quarter.
“The data is already out of date at this point and won’t move the market today,” Garvey said.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 contributed to GDP growth of 0.3% in January
The Bank of England is expected to raise its key rate to 4.25% later this month
James Smith, ING’s developed markets economist, said that despite weakness in areas such as construction and manufacturing, there is a growing likelihood that Britain will avoid a technical recession – a two-quarter consecutive contraction – altogether.
He added: ‘[However] it’s a pretty moot point, since even if it did happen, the depth of a recession would probably only be in 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 HM Treasury in February suggested the city expects GDP to grow by 0.3 and 0 respectively in the first and second quarters of 2023. .4 percent will contract, with the economy down 0.8 percent overall for the year.
Forecasts for February suggest the city expects GDP to shrink by 0.3 and 0.4 percent in the first and second quarters of 2023
The Office for Budget Responsibility is more pessimistic, predicting sequential declines of 0.5 percent in the first two quarters and an overall contraction of 1.4 percent in 2023.
In February, the Bank of England also cut its recession forecast from a 3% dip in 2023 to just 1%, due to falling wholesale energy prices.
Mazars chief economist George Lagarias explained that economic data has improved since February’s forecasts.
He said: ‘We can’t really say we’re very surprised that UK GDP growth exceeded expectations for January.
‘Firstly, consumers are stronger than previously expected, as the tightness of employment conditions is somewhat catching up with inflation in terms of wage growth. In addition, external demand from the major world economies, such as the US and China, is stronger than expected.’
The better-than-expected data raises optimism ahead of next week’s spring budget, potentially giving Chancellor Hunt the opportunity to implement policies designed to stimulate growth.
Myron Jobson, senior personal finance analyst at Interactive Investor said: ‘While public finances are not in the best shape following colossal spending on Covid and recent cost-of-living support measures, they are a lot better than forecast.
The government borrowed £117bn in the financial year to January 2023, £7bn more than the same period of the previous year, but £30bn (on a like-for-like basis) less than the November 2022 OBR forecast.
The unexpected budget surplus is both a blessing and a curse for the government. It broadens the government’s options when it comes to tax and spending decisions – but it won’t stop public sector calls for wage increases amid pressures on cost-of-living finances.”
Public sector wage demands have become a controversial topic, with the likes of BoE Governor Andrew Bailey urging restraint in avoiding 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, bringing bank rates to 4.25 percent, where we expect them to pause .
BoE chief economist Huw Pill recently noted that the data was improving, suggesting that the current momentum in economic activity may be slightly stronger than expected, a signal that the tightening is not over.
“We see that risks have shifted to the upside – BoE could raise rates further if the labor market does not weaken further, although coming weeks on the labor market and CPI inflation will be more relevant in that regard.”
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