• Teachers, doctors, civil service workers and rail workers have all taken part in large-scale strikes in the past few months. These are the groups that contributed the most to the decline in the February services output.
  • Suren Thiru said that ICAEW’s economics director, Suren Thiru, stated the Thursday GDP numbers “suggest the economy has lost its momentum, as high inflation and strike actions continue to drag down key drivers of U.K. Gross Domestic Product, notably industrial and service production.”

LONDON – The U.K.’s economy stagnated in February due to widespread industrial action, and high inflation that persists.

The data released on Thursday revealed a stable GDP for February, which was below the consensus expectation of 0.1%. The service and production sectors both contracted, but were partly offset by the record 2.4% growth in construction.

The GDP growth in January was revised upwards to 0.4%, meaning that output increased by 0.1% over the three-month period ending in February.

Teachers, doctors, civil service workers and rail workers have all taken part in large-scale strikes in the past few months. These are the groups that contributed the most to the decline in the February services output.

The Office for National Statistics reported Thursday that there was “anecdotal” evidence in the monthly business survey results to suggest that February 2023’s industrial action had an impact on various industries at varying levels.

These include the health service (nurses, ambulances), the civil service (teachers, university lecturers and other educators), and the rail network.

Jeremy Hunt, UK Chancellor of the Exchequer, holds the despatchbox as he stands outside 11 Downing Street with treasury officials in London, UK.
Bloomberg

Jeremy Hunt, British Finance minister, said that Britain’s economic outlook is “brighter” than expected. He also stressed that “the U.K. will avoid recession due to the measures we have taken,” as reported by multiple news outlets.

The independent Office for Budget Responsibility does not expect the U.K. to enter a recession in 2023, defined as two quarters of contractions. Gas prices have dropped significantly, which has helped the country’s fiscal situation.

Hunt was able to announce additional fiscal support in the Spring Budget. The Bank of England estimates that this will increase the GDP by 0.3% over coming years.


Fears of recession ‘likely’ to afflict the UK for a long time

The majority of economists do not share Hunt’s optimism, especially as the Central Bank continues to aggressively raise interest rates to curb persistently high inflation. In February , unexpectedly increased to an annual rate of 10.4% .

Suren Thiru said that the ICAEW’s economics director, Suren Thiru, stated the Thursday GDP numbers “suggest the economy has lost its momentum, as high inflation and strike actions continue to drag down key drivers of U.K. Gross Domestic Product, namely services and industrial production.”

Thiru said that “recession fears will likely haunt the U.K., for some time to come as the income boost from lower energy costs and easing of inflation is offset substantially by higher taxes and the delayed impact of increasing interest rates.”

Charles Hepworth of GAM Investments said that Hunt’s claim that the economy is improving is “quite a suspension of belief” given the current circumstances.

The primary cause of the stagnant growth in the U.K. for the past month was industrial strike action. Hepworth stated that March was marked by continued strike action and April saw no reduction. “We are likely to see the depressive effects on any growth continue,” Hepworth said.

LONDON, ENGLAND – JANUARY 16, 2023: Outside Downing Street, protesters from a variety of trade unions are seen at a rally opposing UK government plans that would restrict the right of public sector employees to strike. (Photo by Guy Smallman/Getty Images).
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PwC Senior economist Barret Kupelian said that due to the frequency of strikes across large sectors of the U.K. economy, the U.K. will “likely see a stop and start picture in the future,” in line with the fluctuations of output from month to month.

Kupelian stated that the growth rate for the past three months has been reduced to 0.1%. “The economy is still stagnant, and economic activity struggles to grow above pre-pandemic level.”

ONS confirms that the U.K. is now back to pre-Covid output levels, making it one of the last major economies to achieve this. The slowdown has been attributed to several factors, including the loss of trade due to Brexit and the high level of economic activity caused by long-term illnesses.

Many people are also still mired in an ongoing cost of living crisis as inflation continues to outpace wage increases, increasing the risk of industrial action.

The stagnant growth picture that is painted by today’s figures is likely to be the norm in the near future, according to Stuart Cole, Equiti’s chief macro-economist.


The bottom of the G-20 table

The International Monetary Fund, in its World Economic Outlook, published on Tuesday, projected that the U.K.’s GDP would shrink by 0.3% by 2023. This makes it the worst performing country in the G-20 (Group of Twenty), which includes war-waging Russia.

Hunt’s major fiscal rules, a declining public debt burden and borrowing rates below 3% GDP in the next five-year period, are expected to be missed by Britain.

The IMF has a more optimistic outlook for the medium term than their own estimates. They now predict a GDP growth rate of 1% by 2024 and 1.5% in 2028. This is still well below OBR’s forecast, which was used to support Hunt’s budget commitments.

IMF projects that by 2028 the budget deficit will be 3.7% of the GDP, as opposed to 1.7% predicted by the OBR.

Hunt responded to the IMF’s projections on Tuesday by highlighting that “the U.K. has seen its growth forecasts upgraded more than any G-7 country.”

The IMF has now said that we are on track to achieve economic growth. “By sticking to our plan, we will more that halve the inflation this year and ease the pressure on all,” he said.