The UK economy grew by 0.3% month-on-month in January, according to data published by the Office for National Statistics (ONS) this morning. This followed December’s 0.5% contraction, meaning that overall, the economy flatlined in the three months to January. While it is encouraging to see a return to growth for the UK economy, we believe that a recession in the first half of 2023 is still a distinct possibility as one-off factors boosting GDP growth in January wear off.

The monthly rebound was driven by the services sector, which grew by 0.5% in January, after falling by 0.8% in December. Meanwhile, production and construction output fell in January, by 0.3% and 1.7%, respectively. 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 the fact that school attendance returned to normal levels following a significant drop in December, due to higher than usual numbers of absences (likely due to sickness and concerns about coronavirus as well as other illnesses ahead of Christmas). Output in consumer facing services also bounced back in January with 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. Despite this, the wholesale and retail trade sector still saw a 2.3% fall in output. This signals that the underlying cost-of-living pressures are still having a notable impact on activity.

The one-off forces driving growth in January, such as a resumption of typical school attendance and Premier League activity, will not contribute in the same way to monthly growth in February, when we may see more negative forces have an impact on the headline rate of GDP growth. Growth in regular pay fell in real terms in Q4, by 2.5% on an annual basis, highlighting that consumers have much less spending power at the moment. Furthermore, high input prices, global supply chain issues and a tight labour market continue to affect business costs, highlighted by January’s contraction in the production and construction sectors. Yet, the UK economy has so far proved to be fairly resilient to these forces, 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.

Today’s release corroborates other recent data releases, which have been pointing to the UK economic downturn being less severe than initially feared. For instance, the YouGov/CEBR Consumer Confidence Index increased by 2.4 points in January to 98.3, marking the third straight month of increase in the overall measure. Furthermore, the CPI rate of inflation has slowed for three consecutive months between November and January, though remains above 10%. Therefore, the CEBR has revised its 2023 output forecast upwards, now expecting a 0.4% contraction in GDP over the course of this year.

Josie Anderson is managing economist at the Centre for Economics and Business Research.

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