Strikes affected GDP in December – EY ITEM Club comments

• Disruption caused by widespread industrial action probably explains a large part of December's 0.5% month-on-month fall in UK GDP. There will have been a significant direct impact on affected sectors, while the disruption to rail travel will have had an indirect impact.

• The short-term economic outlook remains challenging. Real household incomes will probably fall further, while monetary and fiscal policy are getting tighter. But less expensive energy offers at least one source of positivity. The EY ITEM Club thinks GDP might fall modestly in the first half of this year, but growth should resume from the summer onwards.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “GDP fell by 0.5% month-on-month in December, which meant that output was flat in Q4 2022 as a whole. Widespread industrial action probably explains a large part of December's fall in activity. There is likely to have been a substantial direct impact on some sectors. For example, shutdowns across the rail network will have weighed heavily on output in the transport sector. There's also likely to have been an indirect impact from the transport disruption, both in terms of stopping people getting to work and compromising their ability to engage in leisure activities.

“The first cut of the expenditure data for Q4 showed a 0.1% quarter-on-quarter rise in consumer spending, with the outturn likely flattered by the comparison with Q3 when there was an extra public holiday. Business investment rose significantly after a big fall in Q3, with large prior revisions meaning it regained pre-pandemic levels. But as was the case earlier in 2022, the ONS had significant trouble balancing the various measures of GDP, resulting in a large alignment adjustment. This suggests there's likely to be large revisions to the Q4 data in subsequent releases, so initial estimates should be treated with caution.

“The EY ITEM Club thinks GDP may dip further in the first half of 2023. The ongoing squeeze on household spending power from high inflation will weigh on consumer spending, while the combination of pressure on profitability and the uncertain outlook makes for a challenging backdrop for business investment. In addition, policy settings will be tight, with a significantly tightening of fiscal policy due to be implemented from April and much of the impact of higher interest rates still to feed through. But less expensive energy, a recent decline in market interest rates from post-mini-Budget highs and a forthcoming inflation-linked uplift in pensions, working-age benefits and the national living wage mean a prolonged downturn is unlikely. The EY ITEM Club thinks the economy should return to sustained growth from the summer.”