Cause for optimism as UK GDP rises 0.8% in January

The latest figures from the Office for National Statistics (ONS) show that the British economy expanded by 0.8 percent in January 2022. UK GDP has also exceeded its pre-pandemic peak (February 2020) by the same amount.

This indicates a sign of recovery after UK GDP fell 0.2% in December during the outbreak of the Omicron variant.

According to the latest ONS statistics, all sectors grew in January 2022, with services up 0.8%, production up 0.7% and construction up by 1.1%.

Output in consumer-facing services also grew by 1.7%, mainly driven by a 6.8% increase in food and beverage activities. All other services grew 0.6% in January.

Services are now 1.3% above their pre-pandemic level, while construction is 1.4% above and production is 2.0% below. Within services, consumer-facing services are now 6.8% below their pre-coronavirus levels, while all other services are 3.4% above.

Industry reaction

Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown, offers her take on the latest figures: ‘’The economy shook off the shackles of Omicron in January with sectors across the board bursting back to health, pushing output 0.8% above its pre-pandemic level. Bars, pubs and restaurants benefited from a spurt of pent-up demand as, after the mass cancelling of events before Christmas, there was a surge of business in what’s usually the quietest month of the year.

“Output for food and beverage activities jumped 6.8%, with revellers shrugging off the shock of Omicron and celebrating once more. That helped the overall consumer-facing services sector grow 1.7%. Building sites also whirred busily in January with construction rising by 1.1%, while the wholesale and retail trade lifted 2.5% and was the main contributor to January’s growth in services.

“However, it’s not a dramatic increase in output for sectors across the board which has lifted the economy above its pre-crisis level. Instead, it’s the jump in human health and social work activities that is the biggest driver here, with the high demand for extra healthcare services through the pandemic. Consumer-facing services are still 6.8% below pre-crisis levels and output from the production sector is 2% below.

“This snapshot has set the scene for a resilient February, with the bounce back from Omicron expected to continue, but the euphoria of the rebound is likely to be short-lived. The conflict in Ukraine has caused already hot commodity prices to heat up again, with households and businesses already feeling the temperature. As lockdown savings dwindle, and higher tax and energy bills are set to land, it’s set to put downward pressure on growth in the months to come.

“The Bank of England’s main task is to maintain stable prices and oversee financial stability, and rip-roaring inflation risks undermining that and overall economic health. So, steering inflation back to the target of 2% is still set to be its priority and it’s still highly likely a rate rise will be on the cards when policymakers meet next week.

“But given the escalating situation, with fresh sanctions being placed on Russian oil exports and severe disruptions to other commodities, which is set to weigh on businesses and consumers, policymakers are expected to limit the rise to 0.25%, pushing the bank rate to 0.75%. The aim will be to try and dampen demand but not squeeze this new spurt life out of the economy, at a time of increased uncertainty.”

Not reflective of rising energy and food prices

Ed Monk, Associate Director at Fidelity International, believes the latest ONS figures do not reflect surging energy and food costs. He comments: “The bounce in growth in January is welcome and pulls the UK economy back above its pre-pandemic level. What happens next is highly uncertain, however.

“Today’s figures do not yet reflect the impact of soaring wholesale energy and food prices on households. That will only become clearer from April when the energy price cap is next lifted, and perhaps not fully until October when current wholesale price hikes can be reflected in bills. If they rise by as much as anticipated, it’s hard to see how consumer spending and confidence will not suffer. Inflation running at 8% is expected to cut disposable income by 5% – and many expect inflation to peak some way above 8%.

“Today’s stronger growth number means the Bank of England remains on its tightening path for now. That’s likely to sap some momentum from the economy, as will expected tax and National Insurance rises from April. With the inflationary hit to household budgets still to be fully realised, there is a risk of overtightening and rate-setters will be watching closely for signs that spending is being squeezed.”

George Lagarias, Chief Economist at Mazars, also provides reason to proceed with caution over the next few months. He comments: “UK GDP rising 0.8% for January significantly beat market expectations for a 0.1% rise. Even more importantly, the services sector output is now above its pre-pandemic levels. The recovery was broad-based and encompassed both services and manufacturing.

“However, a closer look at the numbers suggests that the January rise in GDP might be temporary, as a large part was driven by a rebound in wholesale trading, which had previously collapsed due to the rapid spread of the Omicron variant. The number tells us that the economy was rebounding better than expected before February. However, spiking energy and raw materials prices in February and March may significantly alter the growth calculus. Until supply chains begin to normalise again, we would not expect financial markets to pay too much attention to historic GDP figures.”