January Growth Looks Good for UK Budget
Despite the stagnation of the economy at the end of 2022, the UK saw 0.3% growth in January, according to the ONS. As the economy has started to grow again, it’s good news for the next budget, but many factors at play could still present a possibility of a recession. This is because new year growth can start to wane.
The biggest driver of growth in January was the services sector, growing by 0.5%. In December, the sector shrank by 0.8%. The education sector grew by 2.5%, aiding the service increase. Additionally, thanks to the postponed football games as a result of the World Cup, some consumer facing services grew by 0.3%, but overall retail fell by 2.3%. This is a sign that the cost of living is really affecting people.
Similar growth will not be seen from February onwards though, as football dies away and normal school attendance resumes. More negative forces will start to come into play as households tighten their belts with less disposable income. These include high prices seen against supply chain issues, as indicated by the production sector falling by 0.3% and construction falling by 1.7% in January.
The spring budget, announced today, is expected to benefit from the UK’s resilience to a recession. Despite growth in regular pay falling in real terms at the end of 2022 by 2.5%, the signs pointing to growth at the start of the year could leave room for increased spending in public sector pay, which is something everyone can get behind.
The outlook in January had the effect of raising the value of the pound. Last Friday, it was up 0.54% against the dollar, and the strength of the economy is only likely to help raise this further. Likewise, the fall in energy prices will filter through to lower the Ofgem price cap, with a big delay though. Forecasts from the Office for Budget Responsibility (OBR) are expected to be lower than previous predictions. This will have a knock-on effect of lowering interest rates and increasing levels of growth; any recession will then likely be shallower than expected.
Linked to this is the government support, the threshold for which was increasing to £3,000 in April. However, some people believed that this increase wouldn't go ahead, with support sticking at £2,500. Ahead of the spring budget, the government announced that this is the case. As the energy price cap decreases over the year, the government support may decline to £2,100, therefore spending less on helping households, freeing up funds to help elsewhere.
We will have to see what the spring budget brings, but predictions for the economy’s growth have been all over the place. The OBR predicted a 2% shrinkage for 2023, while NatWest is now predicting a 3.7% growth. It is expected that Jeremy Hunt will keep the budget as “boring” as possible to keep the markets steady, and not have a repeat of the disastrous mini-budget last year.