UK Economy Weathers Recession with Resilience
Quick Summary
Recent data has suggested that the UK economy is showing signs of resilience. Inflation has fallen more than expected, the labour market remained robust, and services inflation slowed. This could lead to a milder recession than previously predicted and a possible end to further interest rate rises by the Bank of England. In addition, retail sales have rebounded and real household spending has marginally expanded. These developments may be due to government energy support packages, cash reserves built up during the pandemic, and the choices made by the chancellor in the upcoming Budget.
Full Story – UK’s resilient economy points to a mild recession
A flow of key data over the past 10 days suggests that the UK economy is showing a level of resilience that was not in evidence just a few months ago.
Inflation has fallen more than expected and the labour market remained robust, according to the latest data, which has left many economists anticipating the end to further interest rate rises by the Bank of England and a milder recession than previously predicted.
With most measures of underlying inflation easing in January, the headline figure fell to 10.1 per cent last month. Services inflation, a better measure of domestically generated price pressures, fell more than expected, including a slowdown in price growth in labour-intensive industries, such as hotels and restaurants.
There are tentative signs that inflation “may not be as persistent and stubborn as some feared,” said James Smith, economist at the Resolution Foundation, a think-tank.
Those figures released last week “increase the likelihood of a milder recession,” said George Moran, economist at the bank Nomura. “Less inflationary pressure should boost real incomes, and also means less financial tightening is required from the Bank of England,” he added.
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Markets are still pricing in a 0.25 percentage point interest rate rise when the Bank of England’s monetary policy committee meets on March 23 but expectations are growing that it could be the last.
Other official data published last week showed that the labour market remained resilient at the end of last year, adding more jobs than expected and the fall in real wages easing. Inactivity, which tracks people outside the workforce, also fell after rising for most of the past three years, a trend that had aggravated labour shortages and added to inflationary pressures.
“Whilst we still foresee a recession this year, we think that this is likely to be shorter and less pronounced than the Bank anticipates,” said Simon Harvey at Monex Europe. The uptick in labour force participation could result in output expanding faster than the central bank has forecast, he added.
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Elsewhere, the economy is also showing unexpected signs of resilience. Analysts were surprised by data released on Friday showing a rebound in retail sales in January, up 0.5 per cent compared with a month earlier. GDP data published earlier this month showed that the economy managed to dodge a recession in the last quarter of 2022, with real household spending marginally expanding despite high inflation and rising borrowing costs.
“The economy is proving to be remarkably resilient to the dual drags of higher inflation and higher interest rates, and it certainly feels as though it isn’t as weak as most had feared,” said Ruth Gregory, deputy chief UK economist at Capital Economics.
She thinks that the government energy support packages have been “effective” and “that households and businesses have been spending the cash reserves they built up during the pandemic”.
The likelihood and depth of any recession depends on the choices made by Jeremy Hunt, the chancellor, in the upcoming Budget on March 15, not least whether he reverses plans to cut energy bill subsidies to households, which will see the cap for a household with typical usage rise by…
