The UK economy is weathering the sharpest cost-of-living crisis in generations better than feared, increasing the chance that the nation will dodge a recession.
(Bloomberg) — The UK economy is weathering the sharpest cost-of-living crisis in generations better than feared, increasing the chance that the nation will dodge a recession.
Survey data showing output rose in the private sector for the first time in seven months along with soaring tax receipts and stronger-than-expected retail sales all point to resilience that has confounded the predictions of officials and economists.
The readings are a fillip to Prime Minister Rishi Sunak and his Conservative Party, which faces a huge task to avoid defeat in a general election that’s less than two years away. But they may also force the Bank of England to continue its quickest round of interest-rate increases in three decades to tame inflation, which remains five times above target.
“While the data suggest that near-term recession odds have fallen considerably, elevated inflation pressures clearly remain a concern,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
S&P on Tuesday unexpectedly reported the first private-sector output growth in seven months. The pound jumped after the announcement, hitting the day’s high against the dollar and the euro, while UK gilts fell, led by losses in shorter maturities.
While the UK may well lag other Group of Seven nations, the worst-case scenarios touted after market turmoil in September and October have yet to materialize.
Earlier this month, the Bank of England upgraded its outlook, predicting the economy will shrink less than 1% over the next five quarters. That’s effectively a prolonged period of stagnation rather than a full-blown recession.
The outlook for the economy is bolstering the public finances, giving Chancellor of the Exchequer Jeremy Hunt as much as £30 billion ($36 billion) for short-term giveaways in next month’s budget after a surplus in the public finances accumulated in January unexpectedly.
Borrowing since the fiscal year that began in April is running £22 billion below the level forecast by the Office for Budget Responsibility in November. The undershoot is more than £30 billion when differences over the accounting of student loans are set aside.
Lower-than-expected debt interest payments along with the strongest self-assessed income tax revenues on record helped reduce the Treasury’s need for cash. Meanwhile, a warmer winter is slashing energy demand and the cost to the Treasury of a subsidy for household natural gas and electricity bills.
Isabel Stockton, a senior research economist at the Institute for Fiscal Studies, said the “good news for the chancellor is that we can expect lower-than-expected spending on debt interest to persist, and the cost of the expensive energy support schemes also to end up lower than forecast.”
The chancellor has ruled out big tax cuts and refused to bow to union demands on pay. He insists his priority is delivering on a government pledge to cut inflation in half this year.
“With debt at the highest level since the 1960s, it is vital we stick to our plan to reduce debt over the medium-term,” Hunt said in a statement. “Getting debt down will require some tough choices, but it is crucial to reduce the amount spent on debt interest so we can protect our public services.”
Other figures released during the month were surprisingly strong. Gross domestic product was unchanged in the fourth quarter, delaying any recession until this year. Until recently, the BOE estimated that a recession got under way in the second half of 2022.
Retail sales rose unexpectedly last month after post-Christmas discounting brought people into stores. Fuel sales rose as prices at the pump fell along with the cost of crude oil.
Wages rose at the quickest pace on record in the latest three month period. While the effects of inflation meant that real incomes are falling, the pickup indicates that demand for workers is strong and the supply of labor tight.
While inflation has eased slightly more than economists had forecast, the latest reading of 10.1% is a full percentage point below the peak in October, which marked a 41-year high. The BOE expects that rate to fall sharply this year along with gas prices.
If anything, the economy remains too hot for comfort at the BOE, which wants to return inflation to the 2% target. The purchasing manager survey from S&P on Tuesday showed that “rising staff salaries had led to a sustained increase” in the prices they charged.
“This will add to the pressure the BOE is already under to raise interest rates further,” said Stuart Cole of Equiti Capital. “The risk that the BOE may have to engineer a recession to bring CPI back to target.”
–With assistance from Philip Aldrick, Alice Gledhill and Andrew Atkinson.
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