UK Reaction: A flat end to 2022
• Monthly GDP for December 2022 rose by -0.5%, below consensus expectations of -0.3%. Q4 GDP was flat in line with consensus expectations.
• UK economy has narrowly avoided falling into a technical recession in 2022 based on the first quarterly estimate, but growth momentum remains weak, and we expect Q1 growth of -0.3%.
• Strikes and cold weather drove output lower in consumer-facing services, whereas energy production was supported by the colder weather.
• Services output fell by 0.8% (consensus -0.1%). Industrial production (IP) rose by 0.3% (consensus -0.2%) and construction output remained flat (consensus -0.2%).
• We continue to expect the Monetary Policy Committee (MPC) to hike rates by 25 basis points (bps) in March. Upcoming inflation and labour market data will be key.
Monthly GDP rose by -0.5% in December on the month, below consensus estimates of -0.3%. This follows growth in November's GDP of 0.1%. Q4 GDP remained flat 0% quarter-on-quarter in line with consensus expectations, but above our expectations of a 0.1% decline and has seen the UK narrowly avoid a technical recession in 2022, which we flagged was a risk. This also comes below the Bank of England (BoE)’s recent estimates of 0.1% growth this quarter. We don’t think this quarter’s stagnation is a precursor of an upcoming pickup in growth momentum; the UK economy remains weak as evidenced by recent deterioration consumer surveys and subdued business surveys, and we expect to see the economy decline further into 2023. Overall in 2022, GDP growth averaged 4.1% following 2021 growth of 7.1%.
In the monthly figures, services output declined sharply by 0.8% (consensus -0.1%) following growth of 0.2% in November – the weakness in services drove the overall increase in output. IP grew by 0.3% (consensus -0.2%) and construction output remained flat after a fall of 0.5% in November (consensus -0.2%).
Strikes and cold weather seen in December impacted output across sectors. The main driver of the fall in services was human health and social work activities, which fell by 2.8%. This was driven by falls in the human health activities industry, with fewer GP appointments and operations, partly because of the impact of strikes. Output in consumer-facing services fell by 1.2%, following a growth of 0.4% (revised up from 0.2%) in November 2022. The sharp decline in December has increased the gap between pre-pandemic levels, with consumer-facing services being 8.9% below February 2020 levels. Lower temperatures in December saw electricity, gas, steam and air conditioning supply rise considerably, acting as the largest positive contributor to production, growing by 5.2%. Energy trends data show that the average temperature in December 2022 was 2.4 degrees lower than in December 2021.
The underlying activity in the UK remains weak, though the global backdrop has improved notably with spot natural gas prices down considerably, suggesting a faster decline in inflation could be possible and more resilience seen in the US and Eurozone. We continue to expect Q1 2023 to decline by -0.3%, shifting the timing that we expect the UK to enter technical recession from Q2 2023 as domestic growth momentum remains soft and the effects of monetary tightening continue to weigh. We forecast GDP growth to average -0.7% this year and 0.8% next year.
We continue to expect the MPC to hike by 25bps at their next meeting in March, bringing Bank Rate to 4.25% where we expect them to pause. Growth slowed by more than the Bank was expecting (Q4 BoE forecasts 0.1%) raising the risk that the MPC could pause, though upcoming data on CPI inflation and labour market next week will be more relevant in that respect.