Britain may be set to avoid a recession entirely after growth surpassed 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 unleash growth-boosting policies.
But markets also have a close eye on the Bank of England’s intentions ahead of its 23 March Monetary Policy Committee meeting, when it is expected to hike base rate by another 25 basis points to 4.25 per cent.
Better-than-expected economic data leaves Chancellor Jeremy Hunt with more options
UK GDP ticked 0.3 per cent higher in January, following a 0.5 per cent slump in December and beating expectations of 0.1 per cent, fresh data from the Office for National statistics showed on Friday.
Education, transport, health, and arts and entertainment were the key drivers of growth, while significant improvement was seen in the services sector with a rise of 0.5 per cent from a 0.8 per cent fall in December.
Orla Garvey, senior fixed income portfolio manager at Federated Hermes, explained the uptick in services was a ‘partial unwind’ of lost output from the fallout of December’s industrial action ‘but has not made up for the entire fall’.
‘This does not change the bigger picture that UK GDP is trending downward and underperforming in relation to other developed market peers,’ she said.
The British economy flatlined in the final three months of the year, having shrunk by 0.3 per cent in the previous quarter.
‘The data is already outdated at this point and will not move the market today,’ said Garvey.
‘More important for markets is the Spring Statement next week and US CPI data.’
The return of Premier League football helped drive GDP growth of 0.3% in January
The Bank of England is expected to hike its base rate to 4.25% later this month
Developed markets economist at ING James Smith said that despite weakness in areas like construction and manufacturing, there is a growing chance that Britain will avoid a technical recession – two quarter of consecutive contraction – altogether.
He added: ‘[However] it’s a fairly moot point, given that even if it does happen, the depth of a recession would probably only be in the order of a few tenths of a percentage point.’
Fresh data on forecasts for UK growth will be published next week, but figures published by HM Treasury in February suggested the City expects GDP will contract by 0.3 and 0.4 per cent in the first and second quarter of 2023, respectively, with the economy shrinking by 0.8 per cent overall for the year.
February forecasts suggest the City expects GDP will contract by 0.3 and 0.4 per cent in the first and second quarter of 2023
The Office for Budget Responsibility is more pessimistic, forecasting consecutive 0.5 per cent dips in the first two quarters and a 1.4 per cent overall contraction in 2023.
In February the Bank of England also slashed its recession expectations from a 3 per cent 2023 dip to just 1 per cent, as a result of falling wholesale energy prices.
Chief economist at Mazars George Lagarias explained that economic data has improved since the February forecasts.
He said: ‘We can’t really say we are too surprised that UK GDP growth exceeded expectations for January.
‘For one, consumers have been stronger than previously anticipated, as tight employment conditions mean that wage growth is somewhat catching up with inflation. Additionally, external demand from the big global economies, such as the US and China, has been stronger than expected.’
The better-than-expected data lifts optimism ahead of next week’s Spring Budget, potentially offering Chancellor Hunt the opportunity to push through policies designed to drive growth.
Myron Jobson, senior personal finance analyst at Interactive Investor said: ‘While public finances aren’t in the best of shape following colossal spend on Covid and latterly cost-of-living support measures, they are a lot better than forecast.
‘The Government borrowed £117billion in the financial year to January 2023, £7billion more than in the same period of the previous year, but £30billion (on a like for like basis) less than the OBR forecast in November 2022.
‘The unexpected budget surplus is both a blessing and a curse for the Government. It broadens the Government’s options when it comes to decisions concerning taxation and spending – but it won’t stem public sector calls around pay rises amid the cost-of-living squeeze on finances.’
Public sector pay demands have become a contentious issue, with the BoE’s Governor Andrew Bailey among those urging 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 hike by 25bps at their next meeting on 23 March bringing Bank Rate to 4.25 per cent where we expect them to pause.
‘BoE chief economist Huw Pill recently noted the improvement in data ‘suggesting current momentum in economic activity may be slightly stronger than anticipated’ a signal that tightening is not yet over.
‘We see the risks tilted to the upside – BoE could raise rates further if the labour market does not moderate further, though upcoming data on labour market and CPI inflation in the coming weeks will be more relevant in that respect.’