News & analysis

January’s monthly GDP print showed the UK economy expanded by 0.2% at the start of the year, fuelling hopes that a technical recession for the UK will remain a 2023 story.

Given that PMI indicators have been printing in expansionary territory for some time, not to mention retail sales activity picked up strongly in January following a weak December, a positive reading this morning is hardly a surprise to markets. Nor does it change the overall picture of the UK economy in our view – growth conditions remain soft, but should continue to improve as the year progresses. That said, it likely removes some downside risk in the minds of policymakers, a fact that should add to MPC confidence that rates can stay on hold until August.

As alluded to, the 0.2% seen in January was in line with consensus expectations.

With January’s composite PMI printing at 52.9, and retail sales data for the same month growing by 3.4%, an uptick in activity to start the new year had been widely anticipated. Similarly, the contributions to growth landed broadly in line with the divergence in PMI indicators, where the services measure recorded expansion with a reading of 54.3 compared to a sub-50 reading in the manufacturing index. For today’s GDP print, this translated into a 0.2% rise in the services index, whilst industrial production actually fell by 0.2% MoM and manufacturing production flatlined following 0.8% growth in December. This was offset however by a decent upside beat for construction output which rose 1.1% MoM, despite having been expected to record a marginal contraction, likely aided by decent weather conditions helping to boost activity in January.

Looking forwards, a stabilisation in the PMI readings at around January levels in February point to a modest further expansion in the next round of data, all else being equal.

Moreover, our bias remains for growth to continue to improve as we move through the year, supported by average real wages growth since May 2023 and the prospect of looser financial conditions in the future. All told, a positive growth outlook should be sterling supportive at the margin, contrasting favourably with weak economic conditions elsewhere across developed markets, most notably in the eurozone and Canada. This is doubly true if a pickup in growth gives the Bank of England confidence to stick with their high for longer stance until August, as we think they will. A combination of better growth and high for longer rates under this scenario should see sterling supported over the longer term in our view, despite a modest softening post-release, with any outperformance set to be particularly notable on crosses against both the euro and the loonie.




Nick Rees, FX Market Analyst



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