UK reaction: Out of the woods, but recovery will be slow.

The UK economy kicked off the year on a stronger footing, with a recovery in real incomes underpinning a rebound in consumers’ spending and stronger public sector activity. Monthly GDP picked up by 0.2% month-to-month in January (as expected) more than offsetting the 0.1% decline in December. Admittedly, GDP still fell overall by 0.1% on a three-month-on-three-month basis. But we think the January’s rise marks the start of a gradual pick-up in economic activity; the worst is probably behind us.

As expected, services sector output was the main contributor to the overall increase in GDP, increasing by 0.2% on the month (consensus 0.2%), following December’s decline of -0.1%. Industrial production (IP) fell by 0.2% (consensus was for no change), but construction output jumped by 1.1%. Note though the monthly increase in the latter wasn’t enough to offset declines in November and December; output in this sector was still down 0.9% on a three-month-on-three-month basis.

Services sector output was bolstered by a rebound in activity in consumer-facing services, with rising real incomes boosting spending. Indeed, retail sales increased by 3.4% on the month, reflecting broad-based increases in spending at supermarkets, department stores and the like. Consumer-facing services output was admittedly unchanged in the three months to January, as was the case with services output overall. But we expect the continued recovery in real incomes ‑ as wage growth continues to outstrip inflation and the additional cut to NICs kicks in ‑ to support further increases over the remainder of the year. Elsewhere, education activity rose by 0.7% in the month, due to an easing in strike action, while health care was bolstered by “market activity” which more than offset Junior Doctor strike action.  

The fall in industrial production, meanwhile, was partly driven by a further 1.3% fall in mining and quarrying in January, after a 1.8% decline in December. Note that output in this sub-sector is now 19.3% below its January 2022 level, with the Department for Energy Security and Net Zero reporting that reduced investment in the North Sea was behind the recent downward trend; output will likely remain in the doldrums for most of this year. More broadly, manufacturing output remained unchanged in January. We think the recovery in this sector will be bumpy given the disruption in the global shipping; the PMI remained below 50.0 in February, though it did post a 10-month high. But with early signs of that the manufacturing cycle may be turning, we expect a gradual pick up in the latter part of the year.

It is important to note that even though we expect growth to pick up over the coming quarters, the recovery will be slow going. Indeed, we have growth of 0.4% pencilled in for 2024. The MPC, therefore, will probably look through the GDP numbers, particularly if the labour market and inflation data continue to cool. We continue to expect the first rate cut of 25bp to be pushed through in August, with two further cuts in November and December, leaving Bank Rate at 4.5% by year-end.

The market reaction was muted given the data came in broadly in line with expectations. Sterling trading at $1.2787, down only slightly from $1.2793.