While the UK looks set to continue to lag behind other major advanced economies in 2023, the year-to-date data balance has been slightly better than expected. An additional blow to the UK compared to the US and the Eurozone comes after a sharp correction in housing market activity in response to monetary tightening and a near-uniquely restrictive fiscal policy. Despite the problems, labor market data for December and January remained strong.

Retail sales rose marginally (+0.4% m/m) in January against forecasts of a further slight decline of 0.2% after a sharp decline of 1.4% in December. In particular, the Purchasing Managers’ Index (PMI) data for February unexpectedly improved, especially in the home services sector. Composite PMI rose to 53.1 in February from 48.5 in January. This was the highest level since June 2022. All sub-sectors contributed to growth: services rose to 53.5 in February from 48.8 in January, manufacturing rose to 49.3 from 47.0, and construction jumped to 54.6 from 48.4 in January . Even if the February PMI reading is only half correct and activity is waning again this March, the data suggests that the first quarter will be less bad than we previously expected. In our outlook review released last Friday, we raised our estimate for first-quarter growth to -0.4% from -0.7% in the previous quarter. This raises our full-year forecast for 2023 to -0.5% from -0.8%. Our estimates for 2024 and 2025 remain unchanged at 1.6% and 1.7%, respectively. If something goes wrong in the near future, the UK is in for a mild recession. We expect real GDP to contract by just 0.8% between Q2 2022 and Q2 2023.

Bloomberg forecasts GDP contraction by 0.6% per year in 2023 and then growth by 0.9% and 1.5% in 2024 and 2025, respectively. Our above forecast is based on the easing of political uncertainty after leaving the EU. and from there. With more confidence in the political situation in the UK, businesses are likely to increase investment.

* Mr. Calum Pickering is an economist at Berenberg Bank.