The latest figures from the Office for National Statistics showed the UK economy is recovering faster than expected despite rising borrowing costs and double-digit inflation.
GDP grew by 0.3% in January thanks to a rebound in the services sector, such as education, following a 0.5% fall in December 2022.
More broadly however, GDP was flat in the three months to January 2023, and remains 0.2% below its pre-pandemic levels.
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The data comes as chancellor Jeremy Hunt prepares to outline his plans for the economy in the Spring Budget next week, and has boosted optimism the forecast recession won’t be as bad as previously expected.
Services sector rebound boosts GDP
The services sector was the main contributor to the boost in GDP, growing by 0.5% in the first month of 2023.
Education was the largest driver of the growth services, growing by 2.5% following a fall of 2.6% the month before as attendance levels returned to normal.
Transport and services grew by 1.6% as postal and courier activities returned to normal following prolonged strike action in December.
The return of the Premier League following its postponement due to the World Cup in December contributed to a 3.4% increase in arts, entertainment and recreation.
Overall output in consumer-facing services grew by 0.3% in January following a fall of 1.2% in December, showing consumers are continuing to spend despite the rising cost of living.
But production output fell 0.3%, largely due to a fall in manufacturing.
The construction sector fell by 1.7% in January after being flat in December 2022, its weakest monthly growth since June 2022.
Has the UK avoided a recession?
The figures were better than expected – Reuters forecast GDP would grow by just 0.1% in January. But this doesn’t mean the UK is out of the woods.
“The slight growth in January is certainly a better-than-expected start to the year, considering the multiple challenges hitting output from double-digit inflation and rapidly rising borrowing costs to falling real incomes and perpetual strike action,” says Alice Haine, personal finance analyst at Bestinvest.
“However, GDP remaining flat in the three months to January 2023 is still a concern for household finances as it indicates companies are making less money, slashing investment and re-examining their staff requirements – something that could see the pace of pay rises slow or worse cause a spike in redundancies.”
“The comforting factor is that the UK is still skirting around a recession and there is some optimism it may not happen at all,” Haine continues. “The British Chambers of Commerce (BCC) expects the economy to shrink by 0.3% in 2023, less than expected, and avoid the key two quarters of negative growth that mark a technical recession.”
That said, inflation remains in the double-digits and the Bank of England (BoE) is widely expected to raise interest rates again when it next meets at the end of the month.
Rising wages are also a concern for the BoE. Despite it still not keeping up with inflation wage growth is running at its highest level since records began, and could prompt the central bank to increase rates further.
Rate rises are intended to encourage saving. But in doing so they discourage spending, so the Bank must balance rate hikes delicately.
The effect of rising rates is clear in the property market, which is widely expected to cool down in 2023 as buyers hold off due to high mortgage rates.
The economy also remained flat in the three months to January, which “tallies with the idea that the UK economy is going to shrink overall this year, even if a technical recession is avoided,” says Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
UK businesses are still struggling from a “specific labour shortage”, says Lund-Yates. “The UK is down around 500,000 workers because of Brexit and the pandemic, and filling the gaps in the areas of the economy these have left is very difficult and has direct consequences for the economy’s ability to grow. Skills shortages keep wages higher for longer, which feeds into higher inflation.”
“The better news is that while the UK is facing slow growth at best and contraction at worst, we aren’t facing a financial crash,” continues Lund-Yates. “Economic activity will slow and that will cause pain for some corners of the economy, but a full-scale financial wipe-out isn’t on the cards as things stand.”
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