By Chris Dorrell
The UK economy is set to take its first steps out of recession this week with GDP figures for January expected to show a return to growth.
City economists think the UK economy will grow 0.2 per cent, driven largely 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 impact of stubborn inflation and high interest rates.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said last year’s minor recession was “already disappearing in the rear-view mirror”.
Sandra Horsfield, an economist at Investec, said the key driver of growth would be a “stronger performance” from the service sector, which has performed well since the turn of the year.
Retail sales figures for January showed that sales volumes were up 3.4 per cent month-on-month, offsetting the steep fall seen in December.
S&P’s services purchasing managers’ index (PMI) for January showed business activity in the sector rising at its fastest pace in eight months.
“Underlying all this, we think, is that inflation is falling more rapidly than wage growth… as a consequence, amid a resilient jobs market, households are seeing faster real income growth,” Horsfield said.
Lower inflation will help living standards recover at a faster pace than previously expected, according to the Office for Budget Responsibility (OBR).
Household disposable income will return to its pre-pandemic peak by 2025-26, two years earlier than in the OBR’s November forecasts. This largely reflects the unwinding of last year’s energy price shock.
The return of UK consumer would help offset the impact of continued strike action in the health sector as well as the persistent downturn in manufacturing, economists argued.
Wood argued that January’s figures would mark the start of an upturn for the UK. “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.
A new survey from accountancy firm BDO meanwhile showed a fourth consecutive month of improving 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,” Kaley Crossthwaite, partner at BDO, said.
