UK (Commonwealth) _The economy of Britain recovered in the beginning of the year, based on data that points to the potential end of the recession.
The Office for National Statistics reported that the gross domestic product increased by 0.2% in January, driven by a rebound in sales for builders and merchants. It follows a 0.1% contraction of the economy in December. Surveyors’ separate data indicates that the home market has become “upbeat.”
“The technical recession that the UK slipped into late last year will be short-lived,” stated Sanjay Raja, an economist at Deutsche Bank. The Office for National Statistics reports that the gross domestic product increased by 0.2% in January, driven by a rebound in sales for merchants and builders.
While the latter two quarters of 2023 had a decline in GDP, which is required for a recession, it was far smaller than previous recessions in recent memory, and surveys indicate the economy is improving. After a dreadful Christmas, the High Street recovered, and building saw a boom after being quiet for most of the previous year.
The effects of high inflation and skyrocketing interest rates have been felt, but as energy costs decline, inflation has declined from its peak, and interest rate cuts by the Bank of England are anticipated soon. Further salary compression is also facilitated by lower inflation. Data released this week indicated that earnings are increasing by 2% in real terms.
The Institute of Chartered Accountants in England and Wales’ Suren Thiru, director of economics, stated that the UK “took its first step towards exiting recession in January.” Yet he issued a warning: “January’s rebound may have been followed by a more subdued performance in February, as it is likely that the heavy precipitation in January inhibited activity.”
The Royal Institute of Chartered Surveyors’ most recent data, meanwhile, indicated “grounds for encouragement” for the property market in February due to an increase in buyer interest and selling instructions.
Next week’s figures are predicted to reveal that inflation has dropped below 4%, which might boost optimism even more. The Bank of England will also announce its March interest rate decision next week. Although rates are predicted to stay same at 5.25 percent, investors will be observing any indications as to when they could begin to decline.
In 2023, the UK economy did better than anticipated. The general consensus in the market at the beginning of 2023 was a 1% decline in GDP. Currently, economists predict growth of 0.5%, which is consistent with our own estimate.
In Q3 2023, corporate investment increased by 6.3% year over year. Although household consumption increased by 0.3%, it is still much below its pre-pandemic level, which was the primary driver of development in normal times. This is mostly due to a series of negative shocks to real wages.
We anticipate that GDP will rise at a slow rate of 0.5% in 2024 and only begin to accelerate in 2025, when it will reach its steady-state rate of about 1%. Businesses may have to decide in 2024 whether to reduce headcount in the event that demand in some industries is expected to remain sluggish or to keep raising prices in an effort to restore profits. If both of these eventualities come to pass at the same time, household real incomes may suffer a double hit.
Headline October saw a 4.6% decrease in CPI inflation due to decreasing energy costs. This implies that in relation to other large economies, the UK is no longer an exception. However, internal factors such as a competitive job market, rapid increases in the cost of services, and and businesses passing along increased expenses to customers — maintain high core inflation.
Employment market
In industries like hospitality and healthcare, where the vacancy rate is still at 4% or higher, nominal wage increase was over 8% in September. In October, the unemployment rate was a mere 4.2%; nevertheless, recent concerns over the accuracy of statistics have increased ambiguity on the present and future trends of the labor market.
Increasing the labor force participation rate would benefit the economy of the nation. Furthermore, more may be done to help that process, such raising the state pension age and implementing further childcare support changes.
The Bank of England
With interest rates currently at 5.25%, they are still higher than our estimated equilibrium rate of around 3%. When the Bank of England is certain that inflation is precisely on target, we anticipate that it will merely normalize policy. It is improbable that will occur prior to the latter half of 2024.
Global economy
See our Global Economic prognosis, December 2023, for our complete examination of the UK’s economic prognosis as well as the outlooks for another 36 nations and economic sectors.
