GDP flatlines, but the UK economy remains resilient

The UK economy saw no growth in February according to the latest figures from the Office for National Statistics (ONS).

GDP was flat throughout the month, with a rise in construction activity offset by strikes in a number of key sectors.

It comes after an unexpected 0.4% rise in January after the ONS revised its growth figures for the month higher (from 0.3% previously). 

And thanks to this positive revision, the UK economy has finally risen above its pre-pandemic levels. 

Based on the latest figures from the ONS, the economy ended February 0.3% bigger than it was in February 2020, before the government began locking down the economy in an attempt to stop the spread of Covid-19. 

This growth above pre-pandemic levels is “an accomplishment that should be celebrated”, said Ellie Henderson, economist at Investec. 

Still, the UK economy remains well behind its peers in this regard. In the last three months of 2022, the US economy was 5% bigger than at the end of 2019, while output in the eurozone has expanded 2.4% over the same time period. 

Strikes hit UK GDP growth 

Output in consumer-facing services grew by 0.4% in February 2023 - having previously risen by 0.3% a month prior - driven by growth in retail trade.

The construction sector grew by 2.4% in February, after falling by 1.7% in January.

But public sector strikes, including civil service and teacher walkouts, offset growth. Education output fell 1.7% during the month.

The ONS said one in nine businesses was directly or indirectly affected by recent industrial action, with three in 10 of those businesses reporting they were unable to fully operate as a consequence.

The ONS's director of economic statistics, Darren Morgan added that “unseasonably mild weather” contributed to a bump in arts, entertainment and recreation output, but led to falls in the use of electricity and gas.

Nevertheless, the figures are mildly positive as they show the economy is holding up better than many expected. 

“If one were looking for positives in the data, unseasonably warm weather and industrial action were the chief drivers of lower growth, rather than a downturn in general business and consumer spending,” noted Jonathan Moyes, head of investment research at Wealth Club.

“The consumer, the construction sector and part of the services sector such as financial services appear to be in good health.”

Chancellor Jeremy Hunt also said the figures show the UK’s economic outlook is “brighter than expected”.

He said: “GDP grew in the three months to February and we are set to avoid recession thanks to the steps we have taken through a massive package of cost of living support for families and radical reforms to boost the jobs market and business investment."

The figures come after the International Monetary Fund said the UK is on track to be the weakest-performing advanced economy this year.

The IMF forecast the UK economy to shrink by 0.3% this year - an estimate revised from the 0.6% contraction forecast in January - primarily on the back of rising energy costs and high inflation. 

What does it mean for investors?

For investors, the latest figures paint an unflattering picture of the UK’s fiscal outlook. The failure of the economy to register growth in February, alongside the IMF’s analysis, shows the UK as being “the weak link” among developed economies, said Tom Stevenson, investment director for personal investing at Fidelity International.

“This is the challenging backdrop for investors, many of whom are scratching their heads at the resilience of the stock market so far this year in the face of a looming economic slowdown. But this is the reality of how markets work,” he said.

The valuation reset last year means that investors are now able to “look through the expected fall in earnings during the results season” that begins this week and throughout 2023, he added.

Stevenson continued: “We continue to believe that the October low for markets will have marked the bottom for this cycle and that falling interest rates during the second half of the year will support both shares and bonds from here.”

Yael Selfin, chief economist at consultancy KPMG UK said economic activity will remain subdued for some time.

“Although business sentiment continues to improve, bolstered in part by the fall in wholesale energy prices, we expect investment to be constrained this year amidst the tightening in credit conditions and uncertainty about future policy direction,” she said.