UK Reaction: Growth flat as strikes hit output
• Monthly GDP for February 2023 rose by 0% on the month, below consensus estimates of a 0.1% rise.
• Output was weighed by strike action. February saw teachers, civil servants and rail workers taking part in industrial action throughout the month.
• Services output rose by -0.1% (consensus -0.1%); industrial production (IP) rose by -0.2% (consensus 0.2%); construction output rose by 2.4% (consensus 0.9%).
• We continue to expect the Monetary Policy Committee (MPC) to hike rates by 25 basis points (bp) in May bringing Bank Rate to 4.50% where we expect it to pause.
Monthly GDP remained flat in February on the month, below consensus estimates of a 0.1% rise. This follows January’s GDP growth of 0.4% which was revised up from 0.3%. Overall, GDP rose by 0.1% in the three months to February 2023. Industrial action across sectors was a considerable drag on growth but despite this, growth is just about holding up. We think it is increasingly possible that the UK will avoid entering a technical recession, but underlying growth momentum remains weak as inflation and the lagged impact of rising rates continue to weigh on the economy and we expect growth to continue to move sideways rather than rebound meaningfully. We lift our expectations of growth for Q1 to 0% (up from 0.1% prior). We now expect GDP to average 0% this year (up from -0.3%) and continue to see growth at 0.5% next year.
In terms of sectors, services output rose by -0.1% (consensus -0.1%) following January’s rise of 0.7% (revised up from 0.5% prior). IP rose by -0.2% (consensus 0.2%) following last month’s decline of 0.5% (revised down from -0.2%) and construction output rebounded by 2.4% (consensus 0.9%) following last month’s decline of 1.7%.
Services output was weighed by strike action. February saw teachers, civil servants and rail workers taking part in industrial action throughout the month. The largest contribution to negative growth was education, which fell 1.7% on the month amidst teaching strikes. Public administration was down 1.1% on the month. The impact of strikes on output is likely to persist as industrial action continues, and March saw further healthcare strikes which are likely to weigh further on output. Outside of sectors directly impacted by strikes, services output rose modestly.
Consumer facing services which have remained subdued as households pull back on discretionary spending has shown signs of improved momentum rising for a second consecutive month by 0.4% on the month following January’s gains of 0.3%. Overall, consumer facing services are still lagging their levels prior to the pandemic (February 2020) standing 8.9% below their previous level compared to all other services which are 2.2% above.
Manufacturing remained flat on the month (consensus 0.2%) but comes alongside upward revisions to January’s figure to -0.1% (from -0.4% prior). Overall, momentum in manufacturing remains weak, mirroring evidence from subdued manufacturing Purchasing Managers Indices and declines were seen in 7 out of 13 sub-sectors. Electricity and gas production was down on the month driven by higher-than-usual temperatures during February which saw demand decline. Increases in construction output were driven by increases in repair and maintenance (4.5%) and new work (1.1%), this increase reflected a bounce back from declines seen in January and was supported by an improvement in weather conditions.
We continue to expect the MPC to hike by a further 25bp at their next meeting on 4 May bringing Bank Rate to 4.50%, where we expect it to pause its hiking cycle. We think this will be a close call and upcoming data on labour market and consumer price inflation will have considerable weight in decision making. Overall, we do not expect the Bank of England to keep rates in restrictive territory for long as we expect adjustment via the labour and housing markets to see, we think the MPC will begin to cut rates from Q4 2023 and pencil in cuts of 25bp per quarter out to end 2024 bringing Bank Rate to 3.25%.
Markets reacted to the signals of resilience in growth despite the downside surprise in the monthly estimate. Sterling appreciated against the dollar and euro following the announcement, rising by 0.2% against the dollar and is currently trading around $1.249.
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