Expected Q1 Contraction Now Likely to be Shallow

Main points

• Monthly GDP grew by 0.3 per cent in January 2023, following a 0.5 per cent fall in December 2022. This growth in the first monthly figure of the new year was driven by the services sector, which saw a pick-up in education, transport and storage, and healthcare and social work activities in January relative to December.
• GDP remained flat in the three months to January relative to the previous three months, and also flat compared to January 2022 (indicating no growth between these periods). As shown in figure 1 below, the UK economy has largely flatlined following the initial stages of post-pandemic recovery; today’s monthly GDP remains 0.2 per cent below its pre-pandemic (February 2020) level.
• We forecast GDP growth of -0.1 per cent in the first quarter of 2023. Not only are we forecasting a shallower contraction than in our last Q1 forecast, but we now also believe upward risks to the forecast have materialised, given optimistic higher-frequency data. For instance, the S&P Global/CIPS UK PMIs for the services and construction sectors report strong growth in business activity in February, as denoted by survey balances of 53.5 and 54.6, respectively. On the demand side, credit and debit card, job vacancy, and housing data point to increasing economic activity over the course of the first quarter of 2023.
• A key takeaway from the S&P Global/CIPS UK Services PMI is that businesses are still reporting price rises that are higher than input costs (e.g. energy bills and wages) despite falling energy prices and reduced shipping rates – the latest sign that persistent inflation may be embedding itself in the UK economy.

“GDP grew by 0.3 per cent in January relative to December, driven by growth in services; in particular, education services grew by 2.5 per cent in January as school attendance levels picked up following a December drop. While this appears to be good news for the UK economy, the broader picture is more ambiguous: GDP was flat in the three months to January relative to the previous three months and also flat compared to January 2022. Despite this, the outlook for the first quarter of 2023 continues to improve as higher-frequency data, including the services and construction February PMIs, indicate that activity will continue to pick-up in February, suggesting that any contraction we might see over Q1 is likely to be shallow.”

Paula Bejarano Carbo
Associate Economist, NIESR

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