The country’s economy expanded by 0.3 percent in January, according to the Office for National Statistics (ONS). This is a significant rebound from a sharp fall in December 2022 but analysts are sounding the alarm that a recession is “likely” even with this growth in Gross Domestic Product (GDP).
Thomas Pugh, an economist at RSM UK, shared why a recession may still be in the UK’s economic future.
He explained: “The 0.3 percent month-to-month bounce-back in GDP in January is more related to the return of Premier League football after the World Cup hiatus than genuine underlying economic strength.
“Indeed, the underlying trend is still negative. Consumer-facing sectors, such as art and recreation, were only able to regain a quarter of Decembers loss, while the manufacturing and construction sectors, which were less affected by one-off disruptions in December, fell sharply by 0.4 percent month-to-month and 1.7 percent month-to-month respectively.
“All in, today’s data reinforces our view that the economy is still likely to slip into a mild recession in the first half of this year as the huge surge in interest rates over the last year takes its toll on the economy.”
The UK narrowly avoided a recession last year due to reporting no growth in the last quarter of 2022.
A country is recognised as being in a recession if it experiences two-quarters of negative growth in GDP consecutively.
As it stands, the UK is the only country within the G7 which has not fully recovered from its lost output following the coronavirus pandemic.
According to the ONS, monthly GDP is currently estimated to be 0.2 percent below its levels from before the pandemic.
RSM’s economist believes further intervention from the Bank of England may be needed with this recent burst in GDP growth.
Mr Pugh added: “In theory, the rebound in GDP might tilt the scales for the Monetary Policy Committee (MPC) in favour of another 25bps interest rate rise later this month. In reality, the labour market and inflation data will be much more influential.
“Given there has been little sign of labour market easing, we still expect rates to rise to 4.25 percent in March before the MPC pauses for breath, but it’s a close call.
“The risk further down the line, is that the labour market remains tight, services inflation proves sticky and the MPC is forced to resume rates hikes in the summer. Don’t rule out a peak of five percent.”
As it stands, the central bank’s MPC has raised the nation’s base to four percent in a bid to control inflation.
With the Consumer Price Index CPI (CPI) rate of inflation currently at 10.1 percent, many analysts do believe further interest rate hikes are likely to happen.
The Bank of England has previously stated it wants inflation to drop to two percent as part of its current targets.
In its announcement of January‘s GDP figures, the ONS also shared specifics of how the economy has grown over the period.
The ONS stated: “The services sector grew by 0.5 percent in January 2023, after falling by 0.8 percent in December 2022, with the largest contributions to growth in January 2023 coming from education, transport and storage, human health activities, and arts, entertainment and recreation activities, all of which have rebounded after falls in December 2022.”
However, production output dropped by 0.3 percent over the month, after 0.3 percent growth in December 2022.
Furthermore, the construction industry fell by 1.7 percent in January despite being steady the month before.