The UK economy recovered in January, posting modest growth after falling into a technical recession in the second half of last year.
Gross domestic product rose 0.2% after a 0.1% decline in December, the Office for National Statistics said on Wednesday. Services and construction contributed gains, offsetting the decline in industrial production.
The data leaves Britain on track to grow in the first quarter as a whole, ending the recession. It is a boost for Prime Minister Rishi Sunak, who is trying to defy opinion polls that suggest his Conservative Party is facing a heavy defeat in a general election due later this year.
“The economy bounced back in January with strong growth in retail and wholesale trade,” said Liz McKeown, economic director at the ONS. “The construction sector also performed well, with home builders having a good month. These were partially offset by declines in television and film production, lawyers and the often erratic pharmaceutical industry.”
What Bloomberg’s economics says…
“The mild recession that hit the economy at the end of last year is over. Growth is set to recover in the first quarter of the year and as a result we are revising our forecast for the first quarter of ’24 to 0.2% from a decline of 0.1%. Recent communications have suggested that the Bank of England is in no rush to ease monetary policy, and signs of recovery provide an excuse to wait a little longer for confirmation that inflation is on track for a sustained return to 2 %. We are moving the timing of the first rate cut from May to June. — Ana Andrade and Dan Hanson, Bloomberg Economics.
However, the recovery is expected to be modest as past interest rate increases continue to impact households and businesses. Analysts expect the UK to follow all other Group of Seven countries except Germany for another year.
With the job market cooling and data next week expected to show a sharp slowdown in inflation, investors are betting that the Bank of England will start cutting rates in August from their highest level in 16 years. Markets are now pricing in four-quarter-point reductions next year.
The pound remained stable around $1.28 following the release. It rose to as high as $1.2894 last week on signs that the U.K. economy was holding up better than many feared. The pound is the best performing currency among the Group of 10 currencies this year, as the BOE is believed to keep interest rates higher for a longer period as growth recovers.
“The economy may be at a turning point,” said Ben Jones, chief economist at the CBI, the nation’s largest employer group. “Momentum is likely to remain weak in the near term, but the outlook for this year is improving.”
January’s growth was boosted by strong retail sales as a 2 percentage point cut to national insurance and a payroll tax came into force, boosting disposable income.
Households, who are already enjoying the return of real wage growth, can expect a further rise in April after Chancellor of the Exchequer Jeremy Hunt announced another 2-point cut in national insurance contributions in his budget last week. Even workers making the minimum wage will get a raise of nearly 10%.
“We are making progress in growing the economy, part of which makes it possible to reduce national insurance contributions by £900 next year,” Hunt said in a statement after the report. “But if we want the growth rate to increase more, we need to make work pay, which means ending the injustice of taxing work twice.”
The strike by doctors in training weighed on January’s growth, which contributed to the highest number of days lost due to industrial action since September.
Retail trade made a strong recovery after a disappointing December, with growth of 3.4% in January, driving services growth in the month. Car repairs have also contributed to the improvement of services.
Healthcare spending grew 0.9%, mostly in the private healthcare sector, while professional services had a slow month and saw activity fall 0.9%. Education grew by 0.7%.
Construction grew 1.1% in the month, beating economists’ forecasts, as private builders resumed work after the Christmas shutdown.
Within industrial production, water supply and sewerage caused a decline. Manufacturing and energy supply made no contribution.
The trade deficit widened by 2.2 billion pounds ($2.8 billion) to 13.8 billion pounds in the three months to January, roughly in line with quarterly deficits last year. The slightly larger deficit was due to a “substantial decline in services exports,” which was partly offset by a smaller deficit in goods.
Exports of goods fell but imports fell even more, the ONS said. It added that there was no evidence that the disruption to shipping in the Red Sea had affected imports in January.
The UK remains increasingly reliant on imports of goods from the EU, which were £5.8 billion more than those from non-EU countries in January, the ONS said. Imports from non-EU countries have been steadily declining since October 2022. UK exports of goods to the EU and to non-EU countries remained more or less the same over the month.
“The technical recession the UK slipped into at the end of last year will be short-lived,” said Sanjay Raja, chief UK economist at Deutsche Bank. “We should see growth gradually return to its trend rate over the course of the year as sentiment continues its upward trend and fiscal and monetary policy eases through 2024.”