Strikes continued to hold back GDP in January – EY ITEM Club comments

• Widespread industrial action continued to weigh on GDP in January, with the economy recovering just over half of the ground lost in December. The EY ITEM Club thinks GDP will struggle to expand over Q1 2023 as a whole, but the risk of recession this year has receded. 

• The possibility that the economy might build on January's growth was supported by the latest construction PMI joining its sectoral peers in rebounding in February. But with Q2 set to have an extra bank holiday, a sustained recovery is unlikely to take root until the second half of 2023, when real household incomes are expected to start turning a corner.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “GDP rose by 0.3% month-on-month in January, regaining just over half of the ground lost in December when output had fallen by 0.5%. Much of December's fall looked to have reflected the impact of widespread industrial action, and further strikes in January likely explain why GDP that month remained below its November level. 

“The sectoral data would appear to corroborate this idea, with sectors heavily affected by industrial action – such as health and transport – reporting that output remained well short of that seen in November. Elsewhere, January saw renewed declines in manufacturing and construction output, with the latter’s fall being particularly significant. After a sizeable fall in December, the recovery in consumer-facing services also underwhelmed, reflecting the ongoing squeeze on household spending power. 

“Several of the sectors affected by strikes appear to be getting closer to settling their industrial disputes, so these effects may begin to fade over the coming months. February's PMIs also suggest that we might now be over the worst, although the picture in sectors not covered by the S&P Global/CIPS surveys – most notably retail – remains somewhat weaker. On balance, the EY ITEM Club thinks GDP is likely to be broadly flat in Q1, a better outlook than the contraction we were expecting only recently.

“Q2 will have an extra bank holiday to celebrate the coronation, and recent experience suggests that will exert a significant effect on output in several sectors. However, prospects look better for the second half of 2023, with falling inflation likely to enable real household incomes to turn a corner.”