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Choppy GDP Means UK Should Avoid Q1 Recession
April 13, 2023
To say UK GDP has been choppy in the last year is an understatement. Today we got a look at another month of growth, and it continues to paint a mixed picture. UK GDP is estimated to have been flat (0.0% MoM) in February, after growth of 0.4% MoM in January (which was revised up from 0.3% MoM). For the three months leading up to February, GDP grew only 0.1% since it includes the weak -0.5% MoM growth in December 2022. In February, the construction sector lead the way with strong growth of 2.4% MoM after a notably weak January (-1.7% MoM). The increase was driven by a jump in repair & maintenance work of 4.5% MoM and a smaller increase in new work of 1.1% MoM. The ONS points out that favorable weather helped to boost the former as it allowed firms to get more work down. Thus, the bump might be temporary, and we might get some sort of a reversal in March.
Outside of construction, the services and production sectors both contributed negatively to overall GDP but at small magnitudes. The production sector contracted -0.2% MoM after a -0.5% MoM decline in January. Manufacturing, specifically, was unchanged as there were a mix of subsectors that gained and lost. Contributing positively were electronics and transport equipment production which were offset by declines in electrical equipment and chemical production. In the end, the production sector made a minuscule -0.03 ppt contribution to topline GDP. The services sector also contracted, down -0.1% MoM after a strong 0.7% MoM growth in January. Like production, there was a mix in the performance of subsectors with the contracting subsectors offsetting those that grew. Of note was a decline in education, down -1.7% MoM, as some teachers went on strike. Additionally, this followed growth of 2.5% MoM in January, so there was a bit of a bounce back there. Services ended up being the worst performing sector of the three, contributing -0.11 ppts to topline GDP.
There have been suggestions that the UK would fall into recession in Q1 2023, but so far, it looks like that might be avoided. A strong January has bolstered growth in the first quarter and good weather seems to have provided support for economic activity in February. Strength in these two months sets us up for disappointment in March but there is a lot of room on the downside before the whole first quarter will turn negative. Remember, December growth was -0.5% MoM, and quarterly growth through February was still up 0.1% MoM. However, early signals of March activity have been a bit disappointing. The UK Manufacturing PMI fell to 47.9 in March (down from 49.3) meaning a deeper contraction likely occurred there, and the Construction PMI’s growth of 54.6 in February was neutralized to just 50.7. The only source of growth will be the services sector which maintained a moderate expansion per last month’s PMI. There is also an improvement to come in education once teacher strikes are quelled. Once you put all the pieces together, it looks very likely that the UK’s GDP will shrink in March, but it is unclear whether or not it will be enough to make quarterly growth negative.