According to data from the Office for National Statistics (ONS), the UK economy saw a 0.3% month-on-month growth in January, following a 0.5% contraction in December. This means that

overall, the economy flatlined in the three months leading up to January. While this growth is an encouraging sign for the UK economy, there is still a risk of a recession in the first half of 2023 as the one-off factors that boosted GDP growth in January wear off.

The services sector was the driving force behind the monthly rebound, growing by 0.5% in January after falling by 0.8% in December. However, production and construction output saw a decline in January, with a 0.3% and 1.7% contraction, respectively. The growth in the services sector was particularly affected by the education sector, which saw an expansion of 2.5% in January following a fall of 2.6% in December. This can be attributed to school attendance returning to normal levels after a significant drop in December, likely due to sickness and concerns about COVID-19 and other illnesses ahead of Christmas.

Output in consumer-facing services also bounced back in January with a 0.3% growth, after a 1.2% decline in December. The full resumption of Premier League matches, after many were postponed for the December World Cup, supported growth in this sector. However, the wholesale and retail trade sector still saw a 2.3% fall in output, signaling that underlying cost-of-living pressures are still impacting activity.

While one-off forces such as typical school attendance and Premier League activity drove growth in January, these factors will not contribute to monthly growth in February in the same way. It is expected that negative forces will have an impact on the headline rate of GDP growth in February. Additionally, growth in regular pay fell in real terms in Q4, by 2.5% on an annual basis, indicating that consumers have less spending power at the moment. High input prices, global supply chain issues, and a tight labor market also continue to affect business costs, as highlighted by the contraction in the production and construction sectors in January.

Despite these challenges, the UK economy has shown resilience so far, maintaining overall output levels. This provides an improved backdrop for the Chancellor ahead of the Budget next week, where he is likely to increase spending in areas such as public sector pay. Recent data releases, such as the YouGov/CEBR Consumer Confidence Index, which increased by 2.4 points in January to 98.3, and the CPI rate of inflation slowing for three consecutive months between November and January, indicate that the UK economic downturn may be less severe than initially feared.

The Centre for Economics and Business Research (CEBR) has revised its 2023 output forecast upwards, now expecting a 0.4% contraction in GDP over the course of this year. However, the risk of a recession in the first half of 2023 remains due to the uncertain economic climate and challenges posed by the ongoing pandemic. It is important for the government to continue to monitor the situation and implement policies that support economic growth and stability. Photo by Images George Rexfrom London, England, Wikimedia commons.