The British economy avoided a recession in the final months of 2022, according to official data, which showed a boost to household finances from state energy bill subsidies but a drop in business investment.
With the economy still hampered by high inflation and concerns about a weak growth outlook, GDP increased by 0.1% between October and December, following a preliminary estimate of no growth.
The Office for National Statistics (ONS) revised GDP in the third quarter to show a 0.1% contraction, a smaller drop than previously estimated.
A recession would have resulted from two consecutive quarters of contraction.
Despite the improvement, British economic output remained 0.6% lower than it was in late 2019, making it the only G7 economy that has not recovered from the COVID-19 pandemic.
“The latest release takes the UK a little further away from the recessionary danger zone,” Investec economist Philip Shaw said. “However, the report does not change the overall picture that the economy’s performance was lacklustre over the second half of 2022 as the cost of living crisis hit hard.”
The International Monetary Fund predicted in January that Britain would be the only Group of Seven major advanced economies to contract in 2023, owing to persistently high inflation.
Since then, a slew of economic data has come in stronger than analysts predicted.
Capital Economics’ Ruth Gregory said Friday’s figures showed that high inflation had taken a slightly smaller toll than previously thought.
“However, with roughly two-thirds of the drag on real activity from higher rates still to be felt, we continue to believe the economy will enter a recession this year,” she said.
According to mortgage lender Nationwide, house prices fell at the fastest annual rate since the financial crisis in March.
The Bank of England (BoE) raised interest rates for the 11th time in a row last week, and investors are divided about the possibility of another increase in May.
Britain’s dominant services sector increased by 0.1%, boosted by a nearly 11% increase in travel agents, echoing other data indicating a surge in holiday demand.
Manufacturing increased by 0.5%, led by the volatile pharmaceutical sector, and construction increased by 1.3%.
Individuals’ savings were boosted by the government’s energy bill assistance program, and disposable income in households increased by 1.3% after four consecutive quarters of negative growth.
The Bank of England expects the British economy to contract by 0.1% in the first three months of 2023, but it anticipates slight growth in the second quarter.
Falling international energy prices and a strong labor market have helped to improve the outlook.
However, the picture could darken again if recent turmoil in the global banking sector causes lenders to tighten lending standards.
BUSINESS INVESTMENT FALLS
According to the data, businesses remained cautious. After changes to the way the ONS calculates seasonal adjustments, business investment fell 0.2% in quarterly terms, a sharp downgrade from a first estimate of a 4.8% increase.
Earlier in the day on Friday, a survey painted a more optimistic picture for businesses.
Jeremy Hunt, the Finance Minister, announced new tax incentives to encourage companies to invest this month, though they were less generous than a previous scheme and came just as the corporate tax was set to rise.
According to the ONS, Britain’s current account deficit was 2.5 billion pounds ($3.1 billion), or 0.4% of GDP, in the fourth quarter.
Taking volatile swings in precious metals out of the equation, the shortfall fell to 3.3% of GDP from 4.2% in the third quarter.
According to the ONS, increased foreign earnings by companies, particularly in the energy sector, have contributed to the reduction of the deficit.
The financial account surplus in the United Kingdom, which shows how the current account deficit was funded, included large net inflows of short-term, “hot” money. For the sixth quarter in a row, net foreign direct investment was negative.
