What do the latest UK GDP data tell us about the economy in 2023?
New data shows the UK economy grew slightly in January. These figures mean that the country’s economic output in 2023 may not be quite as weak as previously expected, although production is likely to remain below pre-pandemic levels in the coming months.
According to the Office for National Statistics (ONS), the UK economy grew by 0.3% between December and January. The latest data, together with a forecast from the National Institute for Economic and Social Research (NIESR), paint a cautiously optimistic picture for the UK economy in the first three months of 2023 compared to previous forecasts.
How is aggregate economic performance measured?
Gross domestic product (GDP) is the most commonly used measure of economic output. We can imagine that the value of all goods and services produced in a country in a given period (e.g. a month, a quarter or a year) is calculated. Economists are often more interested in GDP growth than its level, as this indicates the direction the economy is moving and at what pace, which can help inform policy.
For example, it is more difficult to say that the UK economy produced £634 billion of value between October and December 2022 (the fourth quarter of the year, Q4) than it is to say that it produced 1.3% more over those months than between July and September (Q3). Measuring change gives us more context than just looking at volume.
When looking at GDP data, it’s helpful to look at both monthly and quarterly growth rates to get a complete picture. For example, we know that businesses typically do very well in the weeks leading up to Christmas, but not so well in January.
Simply looking at monthly changes wouldn’t tell us much about the overall health of the UK retail sector – which accounts for around 5% of the whole UK economy. Using quarterly GDP growth, which is the average GDP growth over the three months of a quarter relative to the average of the previous quarter, can help identify a more stable pattern for economic output.
Once a month, the ONS releases monthly GDP estimates with a two-month lag (reflecting the time it takes to prepare for the data release). So although we are publishing this article in March 2023, the latest data is for January.
We use this January estimate together with older GDP data and more frequent data (ie data released with less delay than the ONS release and which can give us some information about economic performance in February and March) to form a forecast for the remaining months of the quarter we are currently in (February and March).
What does the latest GDP data tell us?
The latest ONS data shows monthly GDP grew by 0.3% in January. This was due to an increase in production in services such as education, transport and healthcare, which increased their activity compared to the previous month. This was due to factors such as strikes and the Christmas holidays leading to lower activity in December. So this relative growth can be seen as a product of lower GDP in December rather than strong growth in January.
At the same time, GDP has not grown at all in the three months to January (November-January) compared to the previous three-month period (August-October). In addition, GDP in January 2023 was about the same as in January 2022 – which means no growth over a year. This longer-term trend of flattening growth is illustrated in Figure 1. It is also worth noting that GDP remains below its pre-pandemic (February 2020) level.
Figure 1: UK GDP
Sources: ONS, NIESR
Why is the economy flattening out?
To understand what drives GDP, it helps to break it down by sector. The main sectors of the UK economy are: services (healthcare, restaurants, consultancy, transport, etc.) which account for around 80% of GDP; Manufacturing (manufacturing, mining, etc.), which accounts for about 14% of GDP; construction (residential, commercial, etc.), which accounts for about 6% of GDP; and agriculture (agriculture), which accounts for less than 1% of GDP.
Since the initial post-pandemic surge in services (accelerated by policies such as “eat to help”), service sector growth has continued to slow (see Figure 2). At the same time, the UK has not experienced sustained growth in any of the other three sectors.
Figure 2: Contributions to quarterly GDP growth (percentage points)
Sources: ONS, NIESR
Note: Q1 2021 bar is derived from NIESR forecast
Survey data can help economists and policymakers understand why this is happening. For example, Purchasing Managers’ Indices (PMIs) collect information from a series of questions asked of companies in key sectors. The indices then use the responses to create a measure of business activity.
Over the past year, PMI data shows companies have seen lower order levels as customers cut costs due to budget cuts during the cost of living crisis. Other factors such as trade difficulties related to Brexit and rising borrowing costs (as a result of rising interest rates) were also cited as the main reasons for the lower activity and output.
What does all this mean for forecasts for the UK economy in 2023?
Both the ONS numbers and other retrospective survey data can help us make educated guesses about the coming months. To generate a forecast for the first quarter of 2023, we combine the latest ONS data with higher-frequency data (e.g. consumer confidence survey indicators, which provide us with information about spending on services such as retail, or weather data, which influence our estimates of construction work) in our NIESR ‘Tracker’ analysis.
This gives us a forecast for GDP growth of -0.1% in the first quarter of 2023, which is a smaller contraction than in our last Q1 forecast (of -0.2% growth).
To illustrate why our forecast has improved compared to last month, Figure 3 compares spending and hiring indicators to pre-pandemic levels, while Figure 4 plots recent trends in PMIs.
Debit and credit card spending recovered somewhat in the early months of 2023 after falling (as expected) to pre-pandemic levels following the peak in Christmas spending. At the same time, companies are hiring more people (which doesn’t usually happen in tough economic times) and new homes are being built.
Figure 4 illustrates a possible turning point in the contraction seen across key sectors of the UK economy, with PMI surveys showing heightened activity as consumer and business confidence has risen. Taken together, these two numbers suggest that the upcoming February GDP data could be better than expected – economists call this an “upside risk” to a forecast.
Figure 3: Spending and Hiring Indicators (Weekly Indices)
Sources: ONS, Bank of England, Adzuna, Department for Housing, Communities and Local Government, NIESR
Notes: (a) England and Wales. Debit and credit cards (CHAPS based): Index February 2020 = 100, a backward-looking 7-day moving average, non-seasonally adjusted, nominal prices. Job advertisements: Index February 2020 = 100, weekly average. EPC Certificates: Index February 2020 = 100, four-week moving average, adjusted for public holidays.
Figure 4: Recent trends in PMIs
Sources: Refinitiv Datastream, S&P
Although the latest GDP data shows that the economy grew in January compared to December, we believe that overall we could see a slight slowdown in the first quarter of 2023. This is broadly consistent with the longer-term trend that we have observed in past years of little to no economic growth. The good news is that this is an improvement on previous forecasts and there are signs that we may see even more improvement in the future.
Where can I find out more?
- The NIESR GDP tracker is available here.
- The ONS monthly GDP estimate for January (the latest data at the time of writing) is available here.
- Learn more about GDP: Bank of England statement “What is GDP?”
Who are experts on this question?
- Jagjit Chadha
- Huw Dixon
- Michael McMahon
- Stephen Millard