Sluggish UK economy shows signs of recovery

LONDON (Reuters) – Britain’s economy, which was expected to slip into recession in early 2023, is showing unexpected signs of recovery, prompting questions as to whether the Bank of England is really about to put a pause on rate hikes. I have a question. .

A jump in business activity and consumer confidence and a pick-up in tax revenues have led some analysts to raise their economic forecasts for this year, but growth in both could be weak.

JP Morgan last week raised its GDP growth forecast for 2023 to 0.4% from a previous 0.1%. This is high compared to his 0.5% contraction forecast released by the Bank of England (BoE) in early February.

The UK is the only G7 economy that is still smaller than it was before the coronavirus pandemic. In January, the International Monetary Fund said it would be the only G7 country to see its gross domestic product shrink this year.

Below are some recent indicators of the economy and how investors have increased their bets on future BoE rate hikes.

business survey rebound

Preliminary S&P Global/CIPS UK Composite Purchasing Managers’ Index beats all forecasts in a Reuters poll of economists, jumping from 48.5 in January to 53.0 in February, hitting growth threshold for first time since July exceeded 50.

“The report clearly challenges the BoE’s central view that a prolonged recession and rising unemployment will keep inflation down and make further rate hikes unnecessary,” said JPMorgan economist Alan Monks. It’s a thing,’ he said.

Soaring Consumer Confidence

Britons have become more optimistic about their personal finances and the economic outlook this month, according to market research firm GfK’s Consumer Confidence Index. It was the first increase in almost two years in February.

Tax revenue shows surprising strength

Last week’s public finances data showed a surplus, not the deficit most economists polled by Reuters had expected. This was also supported by his January income tax revenue, the strongest on record going back to 1999, and strong corporate tax revenue.

Bank of England interest rate dilemma

The Bank of England signaled on February 2 that it was close to slowing or pausing the pace of rate hikes after some inflationary pressures eased and the economy was on the verge of slipping into recession.

Since then, however, improving economic data has encouraged investors to increase their bets on bank rates, which are currently at 4.0%, rising to 4.25% next month and 4.5% in May, falling by a third. It has a probability of 1. 5% in August.

UK as G7 laggard

Despite signs of improvement, the UK has lagged behind other countries in its recovery from the pandemic. The UK is the only her G7 economy that has not yet recovered to her end-2019 levels, according to data through the end of 2022. Economists say it reflects the huge impact the pandemic has had on the country and the problems related to Brexit.

Written by William Schomberg Graphics: Sumanta Sen and Vincent Flasseur Editing: Mark Potter

Our standards: Thomson Reuters Trust Principles.