UK economy returns to growth in January

The latest GDP figures show that the UK economy grew by 0.3% in January, after a -0.5% fall in December. The partial rebound was better than expected, largely thanks to the services sector, which grew by 0.6%, having contracted by 0.8% in the previous month. However, it was not all good news as both the construction sector and the wider industrial production sectors contracted by more than expected (-1.7% and -0.3% respectively).

Education rebounds after strikes

Within services, the education sub-sector was largest positive contributor followed by transport and storage. Both sub-sectors rebounded from the negative impact of industrial action that took place in in December. Strikes by teachers and university lecturers impacted education, while train and postal strikes disrupted activity for the wider transport and storage sector. These sectors have seen more strikes since the start of this year, and so there should be a further impact on activity data in the coming months.

World Cup impact

The FIFA World Cup has also been cited as a cause of some of the volatility in data. The arts, entertainment and recreation sector, which encompasses Premier League football, saw a 7.7% fall in activity in December as elite tier football was stopped as the World Cup took place in Qatar. As this is the first instance of a summer tournament being held in the winter, the seasonally adjusted data would not be corrected for this. The resumption of the football season in January lifted activity by 3.4%, but as the number of fixtures will be higher for the rest of the season, data for the sector should also be stronger in the coming months.

Fall in construction

Uncertainty over investment projects, delays and falling residential house prices were all cited as reasons for the 1.7% fall in construction activity. The headwinds facing the construction sector are only likely to intensify as house prices fall further in response to rising interest rates. Public infrastructure projects also appear to be vulnerable, as delays are announced for the construction of new hospitals and the High-Speed Rail 2 (HS2) project. Separately, while heavy rainfall in the first two week of January may have also had a negative impact, damage caused by the weather appears to have boosted repair and maintenance work.

Underlying challenges remain

Although the growth figures are better than expected, they only partially offset the fall in activity recorded in December. Moreover, much of the rebound can be explained by the reversal of on-off effects. The underlying challenges that the economy faces, such as high inflation, rising interest rates, and rising tax burden, all remain.

Inflation is forecast to fall back in the coming months, helping to ease pressure, but it will take time for the economy to adjust to higher price levels. Moreover, although we do not expect the Bank of England to raise interest rates any further, there is a delayed impact from rising rates. By the end of this year, many more households will have come off their fixed rate mortgage deals and will face a sizeable shock when they try to re-finance.