UK economy rebounded in January but caution remains

Latest figures show GDP grew by 0.3% at the start of the year, following a 0.5% fall in December

Construction work by St Paul's Cathedral in London. The UK's construction sector shrank by 1.7 per cent in January. EPA

Guarded optimism that the UK might avoid a recession this year emerged on Friday after figures from the Office for National Statistics showed gross domestic product grew by 0.3 per cent, compared with a 0.5 per cent fall in December.

The figure was better than expected, after a Reuters poll of economists pointed to growth of 0.1 per cent.

According to the ONS, the services sector grew by 0.5 per cent in January, after falling by 0.8 per cent the month before, with the largest contributions to growth coming from education, transport and storage, health activities, and arts, entertainment and recreation, all of which have rebounded after falls in December 2022.

Meanwhile, production output fell by 0.3 per cent in January, following growth of 0.3 per cent in the previous month and the construction sector fell by 1.7 per cent in January, after being flat in December, the ONS said.

“The economy partially bounced back from the large fall seen in December,” said Darren Morgan, ONS director of economic statistics.

“The main drivers of January's growth were the return of children to classrooms, following unusually high absences in the run-up to Christmas, the Premier League [football] clubs returned to a full schedule after the end of the World Cup and private health providers also had a strong month.”

“Postal services also partially recovered from the effects of December's strikes.”

Previously, the UK economy had registered zero growth in the final three months of last year, after shrinking 0.3 per cent in the third quarter.

That avoided a technical recession, which is defined as two straight quarters of economic contraction.

Budget next week

“In the face of severe global challenges, the UK economy has proved more resilient than many expected, but there is a long way to go,” said Chancellor Jeremy Hunt.

“Next week, I will set out the next stage of our plan to halve inflation, reduce debt and grow the economy — so we can improve living standards for everyone,” he said, in reference to his budget speech due on Wednesday.

Meanwhile, Labour's shadow chancellor Rachel Reeves said: “Today's results show our economy is still inching along this Tory path of managed decline.”

“People will be asking themselves whether they feel better off under the Tories, and the answer will be no.

“But this is not a new trend. Thirteen years of Tory failure and wasted opportunities have left growth on the floor and our economy weakened.”

Business leaders gave the slight rebound in the economy in January a cautious welcome.

“The slight rebound in growth at the start of the year wasn’t altogether surprising, given the sharp drop in December, said Ben Jones, lead economist at the Confederation of British Industry.

“But activity is likely to be subdued in the near-term, given the headwinds of high inflation, still-high energy prices and rising interest rates.

“However, sentiment is improving and business leaders are hopeful of a more stable operating environment later this year.”

Kitty Ussher, chief economist at the Institute of Directors, said “while a flat economy overall is not usually grounds for celebration, the fact that these results are more positive than was expected at the time of the Chancellor’s autumn statement in November gives him more room for manoeuvre in next week’s budget”.

“The priority now is to use that flexibility to help put Britain on a sustainable growth path for the rest of the year and beyond,” she said.

Challenging times ahead

However, there was much caution accompanying analysis of the figures, and warnings that the UK economy will struggle in 2023 were repeated.

“This tallies with the idea that the UK economy is going to shrink overall this year, even if a technical recession is avoided,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

“The takeaway for businesses is, unfortunately, that things are going to remain very challenging, with stagnation a likely scenario for some time.

“The better news is that while the UK is facing slow growth at best and contraction at worst, we aren’t facing a financial crash. Economic activity will slow and that will cause pain for some corners of the economy, but a full-scale financial wipe-out isn’t on the cards as things stand.

Alice Haine, Personal Finance Analyst at Bestinvest, said “the economy may have escaped a recession in 2022 — albeit by the skin of its teeth — but it’s too early to say whether the same will happen in 2023".

“The slight growth in January is certainly a better-than-expected start to the year, considering the multiple challenges hitting output from double-digit inflation and rapidly rising borrowing costs to falling real incomes and perpetual strike action.

“However, GDP remaining flat in the three months to January 2023 is still a concern for household finances as it indicates companies are making less money, slashing investment and re-examining their staff requirements — something that could see the pace of pay rises slow or worse cause a spike in redundancies.”