UK GDP: Well, that was a short recession

The rise in GDP in January is a strong signal that the technical recession experienced last year is already over. We expect growth to rebound to 0.2% in Q2, a little above the 0.1% the Bank of England had in their latest forecast. That is unlikely to be strong enough to influence the timing of the first cut in interest rates, which we expect to come in June, instead it is the strength of wage growth that will be the key to rate cut timings. 

The economy probably hit its low point in October and has been gradually recovering since then and will continue to do so. Rising real earnings, tax cuts and lower interest rates will give households disposable income a significant boost in the second half of this year and a recovery in consumer confidence will ensure most of that increase in income is spent. As a result, we expect a consumer-spending led economic recovery in the second half of the year and into 2025. 

Behind the data 

The 3.4% month-on-month (m/m) surge in retail sales that boosted the retail sector by 1.9% explains almost all of the 0.2% rise in GDP in January. Admittedly, this has more to do with difficulties adjusting for seasonal patterns around Christmas than a resurgence in retail spending. But retail spending should rise this year as consumer’s incomes recover. There was also a 1.1% m/m surge in construction after a particularly tough quarter for the industry. We expect construction output to gradually improve this year as rising house prices and transactions encourages house building. Education and health output also rebounded after being dragged down by strikes in December. 

The strength elsewhere was offset by weakness in some of the professional services industries, such as IT, finance and technical services. However, most business surveys are pointing to a recovery in activity this year. 

The outlook

Policy makers are clearly in no hurry to cut interest rates, even though there is growing evidence that monetary policy is becoming increasingly restrictive on the real economy, so the first rate cut is still likely to come in June rather than May. By then, we think the Monetary Policy Committee will have two sub -2% CPI inflation prints in hand, giving it all the cover it needs to ease. 

Overall, today’s data reinforces our view that Q4 last year will represent the nadir of a particularly painful period of stagnation for the UK economy. But we are now at a turning point. We think household real disposable income will post a strong 2.2% year-on-year increase in 2024, propelling real consumer spending to an average increase of 0.5% quarter-to-quarter through 2024. Interest rate cuts are likely to come in the summer and growth should gradually improve in the first half of this year and pick up further after the summer and into 2025.