Though zero growth in UK GDP in February represented a downside surprise, January's rebound was revised up, so the bigger picture is largely unchanged. The EY ITEM Club thinks it's likely that GDP rose slightly on a quarter-on-quarter basis in Q1.
The extra bank holiday and strikes in the health sector are likely to weigh on activity in Q2. However, the recovery should gain traction in the second half of the year from falling household energy bills and the impact of the fiscal loosening announced in the Budget.
The EY ITEM Club’s full Spring Forecast will be published on Monday 17 April – contact James.White3@uk.ey.com for details.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “February's GDP release was a real mixed bag. GDP was flat month-on-month, which was a disappointment as most forecasters had expected another increase. But January's rise was revised up, so the level of output in February was broadly in line with expectations. Drilling down into the detail, industrial action appears to have again exerted a sizeable drag on activity in parts of the public sector in February. However, the impact was mitigated by a rebound in construction output, after activity had been hampered by bad weather in January. The services Purchasing Managers’ Index (PMI) and retail sales had both risen strongly in February, but the read across to the sectoral output data was patchy – while consumer-facing services fared well, growing 0.4% month-on-month, other parts of the services sector were much softer.
“February's outturn came alongside historical revisions suggesting there was greater momentum coming into this year. It’s therefore likely that there was a small increase in GDP in Q1 2023. However, the experience of last year suggests that May's extra bank holiday is likely to cause large, if temporary, falls in output in several sectors, and industrial action in the health sector will also weigh on activity. Therefore, the EY ITEM Club expects a fall in GDP in Q2.
“However, if the greater resilience shown in recent high frequency data is translated into the official output data, then the Q2 fall should be modest. Furthermore, the prospect of lower household energy bills from July and the impact of the fiscal loosening announced in the Budget means that the recovery should gain traction in the second half of this year.”