UK GDP Review: More Gloom?
Fresh downside surprises were the story from the January GDP numbers. Expectations that the economy would enjoy a further successive rise, thereby providing the best three-month showing in two years were dashed as GDP instead stagnated. Weakness was broad-based but most evident in private services and in spite of a bunce in retailing. But as is familiar with recent UK real economy data, it now looks more likely that growth this quarter will be no better than the 0.1% q/q seen in Q4, less than consensus and BoE thinking for this quarter. Moreover, there may be downside risks as activity and sentiment will, of course, be hit by events in the Middle East. Even without the Middle East impact we were suggesting a sub-consensus 2026 GDP picture of 0.8% which now has even greater downside risks attached.
Figure 1: GDP Growth Hardly Strong and With Increasing Downside Risks?
Source: ONS, CE
In fact while recession may be avoided, the economy was already weak and may be even weaker ahead as the backdrop and outlook has changed and we have highlighted several scenarios as to how the Middle East conflict will pan out. But under what we consider the most likely outcome (which envisages limited further fighting) we see oil and gas prices largely falling back to the pre-war levels within a year. Even so, this still results in UK CPI inflation being some 0.5 ppt higher than otherwise, ending this year at 2.5%. We are also skeptical about meaningful second round effects occurring. Indeed, even if inflation expectations rise further this is unlikely to result in higher wage pressures give the current loose state of the labor market and the likely squeeze on profit margins firms may now face. This will be a reflection of an economic backdrop where GDP growth may be as low as 0.5% this year, ie almost half the BoE’s pared-back projection made last month. This reflects already weak demand which we think at least partly reflect tight financial conditions.