UK Reaction: Services drives activity rebound
• Monthly GDP for January 2023 rose by 0.3% in January on the month, above consensus estimates of a 0.1% rise.
• The rebound in services was the primary contributor to January’s growth in output with growth in education, transportation and health activities driving the rise.
• Services output rose by 0.5% (consensus 0.3%); industrial production (IP) fell by 0.3% (consensus -0.1%); construction output fell by 1.7% (consensus 0%).
• We continue to expect the Monetary Policy Committee (MPC) to hike rates by 25 basis points (bp) in March bringing Bank Rate to 4.25% where we expect them to pause.
Monthly GDP rose by 0.3% in January on the month, above consensus estimates of a 0.1% rise. This follows December's GDP growth of -0.5% with no revisions to previously published data in this release. Overall, GDP was flat in the three months to January 2023. The stronger than expected start to Q1 suggests it may be possible for the UK to avoid a technical recession, but the data reflects a rebound following sharp declines in December impacted by strikes across sectors and points less to stronger underlying growth momentum. We continue to expect Q1 growth of -0.1%, with risks skewed to the upside.
Looking at the sectoral breakdown, services output rose by 0.5% (consensus 0.3%) after falling by 0.8% in December – the rebound in services was the primary contributor to January’s growth in output. IP fell by 0.3% (consensus -0.1%) and construction output fell by 1.7% after being flat in December (consensus 0%) and now stands at its lowest level since February 2022.
The largest driver of growth in services was education, which rebounded by 2.5% after a fall on 2.6% in December as school attendance levels returned to normal levels after a significant drop in attendance levels in the run up to Christmas. Rebounds in postal activity also contributed to the rise following postal strikes impacting December’s output. A resumption of Premier League football also contributed to the rise as matches returned to a full schedule following fixtures being postponed in December for the World Cup.
Consumer facing services which have remained subdued as households pull back on discretionary spending and have also been impacted by industrial action particularly on transport rose by 0.3% on the month, following a fall of 1.2% in December. Overall, consumer facing services remain 8.6% below their pre-pandemic levels (February 2020) whilst all other services were 2.1% above.
Declines in IP were driven by falls in manufacturing which decline 0.4% on the month (consensus -0.1%). Manufacturing weakness was broad based and saw declines in seven out of its 13 subsectors. Sharp declines in new construction work drove the overall fall in the sector (-1.7% m/m) with economic uncertainty likely leading to delays and cancellations and a reduction in work being requested by customers.
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 forecast Q1 2023 to decline by -0.1%, as domestic growth momentum remains soft, and the effects of monetary tightening continue to weigh but growth could plausibly come in higher. Particularly considering the recent strengthening of survey indicators with February purchasing managers index (PMI) data moving into growth territory for the first time since July 2022, but we continue to see challenges to the consumer and the demand side of the economy and expect growth to be subdued either way. We now forecast GDP growth to average -0.3% this year and 0.5% next year (from -0.7% and 0.8% respectively).
We continue to expect the MPC to hike by 25bp at their next meeting on 23 March bringing Bank Rate to 4.25% where we expect them to pause. Bank of England (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.
Sterling rose against the dollar and the euro on the back of the figures, rising by 0.2% against the dollar and is now trading at around $1.195 at the time of writing.