Little Relief Expected for Households with GDP Set to Contract by 0.2% in Q1 2023

Main points

• Monthly GDP fell by 0.5 per cent in December, following an unrevised rise of 0.1 per cent in November. The end-of-year fall in the monthly figure was driven by a decrease in services resulting primarily from strikes, decreasing vaccination activity, the Premier League break, and cost-cutting from clients facing squeezed budgets.
• GDP remained flat in the fourth quarter of 2022, bringing annual growth to 4.1 per cent. The latest data thus suggest that the United Kingdom narrowly avoided a technical recession in 2022. However, this will be little consolation to most households, which have seen significant hits to their real incomes over the course of the last year.
• Concerningly, the S&P Global/CIPS UK PMIs for January recorded figures below the neutral 50 (indicating contracting output) for the services, manufacturing and construction sectors for a consecutive month. That said, businesses optimism rose in all three sectors as a softening in the rate of energy inflation and ‘tentative’ signs of a turnaround in sales prospects emerged in the new year, possibly signalling that the ongoing terms of trade shock will be both temporary and short in duration.
• A key takeaway from the S&P Global/CIPS UK Services PMI is that businesses are reporting price rises that are higher than input costs (e.g. energy bills and wages) – the latest sign that persistent inflation may be embedding itself in the UK economy.
• We forecast GDP growth of -0.2 per cent in the first quarter of 2023. For a comprehensive outlook of the entire UK economy in 2023, our Winter Economic Outlook – published 8 February.

“Today’s ONS figures suggest that monthly GDP fell by 0.5 per cent in December, driven by a 0.8 per cent fall in services which saw significant decreases in human health and social work activities resulting from strikes and a drop-off in vaccination activity. Interestingly, monthly output in consumer-facing services fell by 1.2 per cent in December following growth of 0.4 per cent in November; the ONS associates this surprise with the gains to food and beverage activity from the FIFA World Cup being overtaken by a 17 per cent loss in sports activities, and amusement and recreation activities due to the break in the Premier League.  The monthly data suggest that GDP was flat in the fourth quarter of 2022. While this means that the UK avoided a technical recession in 2022 – that is, two consecutive quarters of contracting growth – it is important to remember that it will have felt like a recession for most households as the cost-of-living crisis eroded living standards in the UK.”

Paula Bejarano Carbo,
Associate Economist, NIESR

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See our Winter UK Economic Outlook for more analysis