The UK economy stalled unexpectedly in February when strikes crippled the public services, leaving little hope for a significant improvement in the lead-up to the next general election.
(Bloomberg) — The UK economy stalled unexpectedly in February when strikes crippled the public services, leaving little hope for a significant improvement in the lead-up to the next general election.
Gross domestic product was unchanged from January instead of eking out the 0.1% growth analysts had expected, the Office for National Statistics said Thursday. The figure for January was revised up to 0.4%.
Together, the readings further reduce the risk of a recession this year but leave the UK on track for an extended period of sluggishness. With inflation lingering in double digits well above the Bank of England’s 2% target, consumers are tightening their belts to adapt to a cost-of-living squeeze.
“Growth in the UK is stagnating and has fallen behind its developed market peers,” said George Lagarias, chief economist at accountancy firm Mazars, who read the report as “bad news” for the UK. “We expect the UK to continue to underperform the other G-7 economies for the time being.”
That contrasts with the upbeat assessment from Chancellor of the Exchequer Jeremy Hunt, who said in a statement after the GDP report that the outlook is “looking brighter than expected.” Hunt separately told Bloomberg Television on Wednesday in Washington that the UK would do “significantly better” than the International Monetary Fund had projected, potentially setting the stage Prime Minister Rishi Sunak to renew his mandate with voters next spring.
Even so, the broader outlook is for growth well below what the UK has enjoyed in previous years. The central bank estimates the economy can grow just 0.7% without sparking inflation, reflecting worker shortages after at least 500,000 people dropped out of the labor market since the pandemic.
Reports due next week on inflation and wage growth are likely to have a decisive influence on the BOE’s next interest rate decision in May, when policy makers led by Governor Andrew Bailey will determine whether to continue their quickest monetary tightening in three decades.
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“It’s the upcoming CPI and jobs market releases that will be central to decision making at the next policy meeting. We expect data to fall in line with the BOE’s forecast, giving it enough reason to hold rates steady in May at 4.25%.”
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Investors have bid up the likelihood for further rate hikes, pricing in an 80% chance of a quarter-point increase next month to 4.5% and an almost certain further increase to 4.75% by September.
Bailey, speaking last night in Washington, voiced optimism that the banking system had survived the rescues of Silicon Valley Bank and Credit Suisse, leaving monetary policy makers a free hand to combat inflation.
“What we shouldn’t be doing is saying, we’ve got such a problem with financial stability that we have to aim off a decision on monetary policy because of conditions and financial stability,” Bailey said at the International Monetary Fund’s spring meeting.
Hunt also is optimistic about the UK’s prospects, with the latest readings bringing the UK into line with other Group of Seven nations with output back above pre-pandemic levels.
Read more: UK Will Beat IMF’s Dismal Growth Forecasts, Chancellor Hunt Says
Assuming no revisions, the economy probably grew 0.1% in the first quarter unless the figure for March shows a contraction of more than 0.2%, the ONS said.
A contraction of 0.6% would be required for GDP to fall 0.1% on the quarter, as forecast by the Bank of England. That would be a bigger fall than in December, when consumer sentiment was weaker and the country suffered the most days lost due to strikes since 2011.
“While a flat economy is not usually grounds for celebration, there are some encouraging signs in today’s data,” said Kitty Ussher, chief economist at the Institute of Directors. “Were it not for the industrial action that took place in the public sector, the economy overall would have grown.”
There were a number of one-time factors dragging down the latest reading. February figures reflect the impact of widespread industrial action during the month. Services output fell 0.1%, hit by walkouts by teachers and civil servants. Manufacturing, which economists had thought would deliver small growth, also showed no change in the month.
Strikes intensified during the month, with teachers in England staging a national walkout on Feb. 1 in their dispute over pay and regional strikes on other days. Other action involved rail workers, university staff, nurses, paramedics and civil servants.
February also was unusually warm, reducing output from utilities.
Education output slumped 1.7% during the month, making it the largest contributor to the fall in services output. Public administration was the second largest contributor, falling by 1.1%.
These declines were partially offset by growth in six of the 14 services sub-sectors. The largest contributors to this were human health and social work activities and other service activities, which grew by 0.3% and 2% respectively.
Despite the fall in the services sector, consumer-facing services grew by 0.4% in February, driven by retail which expanded at the fastest rate since October. However consumer-facing services are still 8.9% below their pre-pandemic level, while other services have clawed back losses to be up 2.2%.
Second-quarter results may be dragged down by an extra bank holiday to mark the coronation of King Charles III. Further ahead, the fiscal loosening Hunt announced in his March budget will start to help the economy in the second half.
“A combination of upward revisions in GDP data and an improvement in global economic conditions could help the UK economy avoid a recession this year,” said Yael Selfin, chief economist at KPMG UK. “While this will provide relief for policymakers, the outlook for growth in the medium-term remains relatively weak by historical standards.”
Read more:
- UK Will Beat IMF’s Dismal Growth Forecasts, Chancellor Hunt Says
- UK’s Hunt Hints Growing Economy Sets Stage for Polls Next Spring
- Bailey Says BOE Financial Stability Issues Will Not Affect Rates
- UK Property Surveyors See Sales Pickup for First Time in a Year
–With assistance from Elina Ganatra.
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