New data show that the UK economy grew slightly in January. These figures mean that the country’s economic performance in 2023 might not be quite as weak as previously expected, although output is still likely to remain below pre-pandemic levels over the coming months.
The UK economy grew by 0.3% between December and January, according to the Office for National Statistics (ONS). The latest data, together with a forecast produced by the National Institute for Economic and Social Research (NIESR), give a cautiously optimistic picture for the UK economy in the first three months of 2023 compared with previous projections.
How is overall economic performance measured?
Gross domestic product (GDP) is the most used measure of economic performance. We can think of it as calculating the value of all the goods and services produced in a country in a given period (for example, a month, a quarter or a year). Economists are often more interested in GDP growth than its level because this indicates the direction in which the economy is moving and at what pace, which can help to inform policy.
For example, saying that the UK economy produced a value of £634 billion between October and December 2022 (the fourth quarter of the year, Q4) is harder to conceptualise than saying that it produced 1.3% more in these months than it did between July and September (Q3). Measuring change gives us more context that looking at volume alone.
When looking at GDP data, it is useful to look at both monthly and quarterly growth rates to get the full picture. For example, we know that shops usually perform very well in the weeks leading up to Christmas, but then less well in January.
Simply looking at month-on-month changes would not teach us a lot about the overall state of the UK retail sector – which accounts for approximately 5% of the total UK economy. Using quarter-on-quarter GDP growth, which is the average GDP growth in the three months making up a quarter, in reference to the average of the previous quarter, can help to establish a more stable pattern for economic performance.
Once a month, the ONS releases estimates of monthly GDP with a two-month lag (reflecting the amount of time it takes to prepare the data release). So, although we are publishing this article in March 2023, the latest data are for January.
We use this January estimate, together with older GDP data and higher-frequency data (that is, data that are published with less of a lag than the ONS release and can give us some information about economic performance in February and March), to form a forecast for the remaining months in the quarter we are currently in (February and March).
What do the latest GDP data tell us?
The latest ONS data show that monthly GDP grew by 0.3% in January. This was due to a rise in output in services like education, transport and healthcare, which increased their activities compared with the previous month. This was due to factors such as strikes and the Christmas holidays generating lower activity in December. So, this relative growth can be thought of as a product of lower GDP in December rather than strong growth in January.
At the same time, GDP did not grow at all in the three months to January (November-January) compared with the previous three-month period (August-October). What’s more, GDP in January 2023 was about the same as that of January 2022 – representing no growth over a year. This longer-term trend of flatlining growth is illustrated in Figure 1. It’s also worth noting that GDP remains below its pre-pandemic (February 2020) level.
Figure 1: UK GDP
Sources: ONS, NIESR
Why is the economy flatlining?
To understand what’s driving GDP, it is useful to break it down by sector. The main sectors that make up the UK economy are: services (healthcare, restaurants, consulting, transport, etc.), which make up around 80% of GDP; production (manufacturing, mining, etc.), which makes up around 14% of GDP; construction (residential and commercial building work, etc.), which makes up around 6% of GDP; and agriculture (farming), which makes up less than 1% of GDP.
Since the initial post-pandemic jump in services (boosted by policies like ‘eat out to help out’), there has been a persistent decline in services-sector growth (see Figure 2). At the same time, the UK has not seen sustained growth in any of the other three sectors.
Figure 2: Contributions to quarterly GDP growth (percentage points)
Sources: ONS, NIESR
Note: The bar for Q1 2021 is derived from the NIESR forecast
Survey data can help economists and policy-makers to understand why this is happening. For example, Purchasing Managers Indices (PMIs), gather information from a set of questions posed to businesses in the key sectors. The indices then use the responses to produce a measure of business activity.
Over the last year, PMI data show that businesses have seen lower order levels, as clients have been cost-cutting due to budgets being squeezed during the cost of living crisis. Other factors, such as Brexit-related trade difficulties and rising borrowing costs (as a result of increasing interest rates), have also been cited as key reasons behind lower business activity and output.
What does this all mean for forecasts for the UK economy in 2023?
Both the ONS figures and other backward-looking survey data can help us to make informed guesses about the coming months. To produce a forecast of the first quarter of 2023, we combine the latest ONS data with higher-frequency data (such as survey indicators of consumer confidence, which give us information about spending in services like retail, or weather data that can inform our estimates of construction output) in our NIESR ‘Tracker’ analysis.
To contextualise why our forecast has improved relative to last month, Figure 3 compares spending and hiring indicators to pre-pandemic levels, while Figure 4 records recent trends in PMIs.
Debit and credit card spending has recovered somewhat in the first months of 2023 after having plummeted (as expected) to pre-pandemic levels following the Christmas spending peak. At the same time, businesses have been hiring more employees (which normally does not happen during difficult economic times), and new houses are being built.
Figure 4 illustrates a possible turning point in the decline that had been seen in key sectors of the UK economy, with PMI surveys showing increased activity as consumer and business confidence has grown. Taken together, these two figures suggest that the upcoming February GDP data may be better than expected – economists refer to this as an ‘upwards risk’ to a forecast.
Figure 3: Spending and hiring indicators (weekly indices)
Sources: ONS, Bank of England, Adzuna, Ministry of Housing, Communities and Local Government, NIESR
Notes: (a) England and Wales. Debit and credit cards (CHAPS based): Index February 2020 = 100, a backward looking seven-day rolling average, non-seasonally adjusted, nominal prices. Job adverts: Index February 2020 = 100, weekly average. EPC certificates: Index February 2020 = 100, four–week rolling average, adjusted for timing of holidays.
Figure 4: Recent trends in PMIs
Sources: Refinitiv Datastream, S&P
Although the latest GDP data show the economy growing in January relative to December, we think that overall, we might see a shallow contraction in the first quarter of 2023. This is broadly consistent with the longer-term trend that we have observed over the past year of little-to-no economic growth. The good news is that this represents an improvement over previous forecasts, and there are signs that we may see even more improvement moving forward.
Where can I find out more?
- The NIESR GDP tracker is available here.
- The ONS January monthly GDP estimate (the latest data at the time of writing) is available here.
- Find out more about GDP: Bank of England Explainer ‘What is GDP?’
Who are experts on this question?
- Jagjit Chadha
- Huw Dixon
- Michael McMahon
- Stephen Millard