You can tell it has been a bleak midwinter when figures showing quarterly GDP growth of 0.1 per cent set the pulses racing.
The latest GDP estimates from the Office for National Statistics (ONS) came in ahead of analysts’ expectations – most expected a 0.1 per cent contraction – and saved the Chancellor from the immediate risk of a recession.
December’s figures showed that GDP grew 0.4 per cent, comfortably ahead of consensus.
“The sighs of relief from the Treasury to today’s GDP data seem almost audible across the City,” Sandra Horsfield, senior economist at Investec said.
But although these figures were ahead of expectations, there are still plenty of reasons not to pop open the champagne just yet.
Momentum weak
Remember these figures cover October through December, so they include the impact of pre-Budget uncertainty and the subsequent impact of the announcements on the economy.
The breakdown from the ONS includes some striking details. Business investment is estimated to have fallen 3.2 per cent in the quarter, the first fall in over a year.
“Uncertainty and tax hikes hit business investment hard,” Rob Wood, chief UK economist at Pantheon Macroeconomics said.
Household consumption stagnated, having grown 0.6 per cent in the previous quarter, pointing to the impact of subdued consumer confidence.
Government spending meanwhile increased by 0.8 per cent, due to higher spending on defence and health.
“October’s Budget decisions contributed to rising public sector activity, but contributed to falling private sector activity,” Paul Dales, chief UK economist at Capital Economics summarised.
All of these figures are subject to revision, but the initial picture is not particularly encouraging.
There was further bad news for Reeves elsewhere. GDP per head fell 0.1 per cent in the quarter, having fallen 0.3 per cent the quarter before.
Shadow business secretary Andrew Griffith said the UK was suffering “an official GDP per head recession”. A recession is typically defined as two consecutive quarters of negative contraction.
The good news
The encouraging news for the Chancellor is that the more recent figures – GDP figures covering December alone – were comfortably the strongest.
Output rose 0.4 per cent in December, up from 0.1 per cent the month before. Economists had expected monthly growth to remain at 0.1 per cent.
“The pickup was driven by the services sector, which saw a broad-based improvement,” Matt Swannell, chief economic adviser to the EY Item Club noted.
Wholesale, film distribution, machinery manufacturing and the pharmaceutical sector all recorded strong growth, the ONS said.
Output in consumer-facing services rose 0.4 per cent in December thanks to strong food and drinks sales, having grown by an upwardly revised 0.6 per cent the month before.
Early indicators covering January suggest that retailers have seen greater demand in the new year too, with the British Retail Consortium’s latest report showing non-food sales rising at the fastest pace in nearly two years.
“The consumer looks to be rebounding in the new year, judging by strong hospitality and non-food retail sales reported by the industry bodies and the December hard data,” Wood said.
Outlook
Nevertheless, the economy has clearly slowed significantly in the second half of the year, driven largely by the government’s gloomy rhetoric and the impact of Budget tax hikes.
As business surveys have reported for a number of months, output in the private sector is more or less flat. Firms have also been slashing staff in preparation for April’s tax rise.
Many forecasters still expect to growth to pick up in 2025, with the consensus forecast still hovering around 1.2 per cent despite a succession of downgrades.
“The near-term UK recovery now rests on three pillars: less restrictive fiscal and monetary policy, a savings-led household consumption recovery, and a rebalancing in trade,” Sanjay Raja, chief UK economist at Deutsche bank said.
But Dales at Capital Economics was gloomy about the immediate future. “The economy is unlikely to do more than move sideways over the next six months,” he said.