UK economy is showing positive signs of recovery

The UK economy is set to take its first steps out of a recession this month with GDP figures for January showing a return to growth. The economy grew 0.2 per cent in the first month of the year, driven by a strong performance from the all-important services sector. This would put the UK on the road to recovery after it fell into a shallow recession in the second half of last year as the economy battled the impacts of stubborn inflation and high interest rates.

Chief UK economist at Pantheon Macroeconomics, Rob Wood, said last year’s minor recession was “already disappearing in the rear-view mirror.” An economist at Investec, Sandra Horsfield, said the key driver of growth would be a “stronger performance” from the service sector, which has performed well since the start of the year.

S&P’s services purchasing managers’ index (PMI) for January showed business activity in the sector rising at its fastest pace in eight months. Retail sales figures for January also showed that sales volumes were up 3.4 per cent month-on-month, offsetting the steep fall seen in December.

Horsfield said: “Underlying all this, we think, is that inflation is falling more rapidly than wage growth, as a consequence, amid a resilient job market, households are seeing faster real income growth.”

The Office for Budget Responsibility now predicts that household disposable income will return to its pre-pandemic peak by 2025-26, two years earlier than its November forecasts. This largely reflects the unwinding of last year’s energy price shock. Wood said that January’s GDP figures, marked the start of an upturn for the UK economy. “This is not a flash in the pan,” he said, pointing to high levels of corporate confidence.

According to S&P’s PMI, business confidence hit its highest level since February 2022 last month thanks to the prospect of lower interest rates. Meanwhile, a separate survey released from accountancy firm BDO showed a fourth consecutive month of improving UK economic activity, bringing its output index to its highest level since July 2022.

“It’s heartening to see signs of recovery from our resilient services and manufacturing sectors after a tough period of high interest rates and lower demand,” said Kaley Crossthwaite, a partner at BDO.

New figures show, wage growth came in slightly below expectations as evidence builds that the Bank of England’s interest rate hikes are creeping into the wider economy. Annual pay growth including bonuses averaged 5.6 per cent between November and January, according to figures from the Office for National Statistics (ONS). Economists had expected it to remain more or less stable at 5.8 per cent.

Excluding bonuses, the figure was 6.1 per cent compared to 6.2 per cent previously. Although wages are now growing more slowly than before, lower inflation means households are actually still seeing a boost to their real pay, which rose 1.4 per cent between November and January.

ONS director of economic Liz McKeown said: “Recent trends in the job market are continuing with earnings, in cash terms, growing more slowly than recently but, thanks to lower inflation, real terms pay continues to increase.”

There were other signs that the labour market, which has so far been remarkably resilient to the Bank’s rate hikes, might be easing. Unemployment crept up to 3.9 per cent from 3.8 per cent, above market expectations. The number of vacancies fell by 43,000. This means that vacancies have been falling for 20 consecutive quarters.

“The ONS figures paint a familiar picture of further gradual softening in the labour market and easing pay pressures, but it remains an incremental process,” Jack Kennedy, senior economist at Indeed said in relation to the new data. (The writer is our foreign correspondent based in the UK)