UK GDP stagnated in February according to the ONS, after a 0.4% increase m/m in January. The drop in activity in services (-0.1% m/m) and industry (-0.2% m/m) was offset by the upturn in the construction sector (+2.4% m/m), which had contracted sharply in January (-1.7% m/m). The economy was therefore resilient, despite the negative impact of strikes in the public administration and education, which led to a drop in activity in these two sectors, of 1.1% m/m and 1.7% m/m respectively in February. At the same time, March’s PMI indices showed an improvement in activity in services (52.8), while manufacturing sector shrank (47.9).
United Kingdom: Economic indicators quarterly changes
Retail sales, although remaining down 3.5% y/y, rose sharply in February (+1.2% m/m), driven by sales in non-food (+2.4% m/m, excluding fuel) and food retail (+0.9% m/m). Given these data, overall private consumption was therefore able to hold out in February, limiting the expected drop in GDP in Q1 2023.
Inflation fell in March (+10.1% y/y), mainly due to the decrease of fuel prices and to favourable base effects on energy prices. However, this level remains exceptionally high and uncomfortable for the Bank of England. The persistence of core inflation (+6.2% y/y), the still high wage growth (see below), as well as the relatively good activity figures are all factors that will support its decision to raise rates by 25 bps at its next meeting in mid-May.
The labour market remains resilient but continues to slow. According to the ONS, the unemployment rate rose from 3.7% in January to 3.8% in February. Wage growth momentum is continuing at a sustained pace (+6.6% y/y in February), which has two implications. On the one hand, this means that jobseekers retain significant wage bargaining power and that their inflation expectations are staying high. On the other hand, this also means that wage pressure on prices will persist, slowing disinflation.
GDP Growth
Defying forecasts, the British economy is holding up and does not seem to be heading towards the expected contraction in Q1. However, this contraction would not be avoided in Q2 (-0.2% q/q according to our forecasts), due to the effect of inflation on household purchasing power, and to the rise in interest rates which is impacting business investment.
Guillaume Derrien and Louis Morillon (intern). Article completed on 19/04/2023.
