Green shoots in the UK economy are emerging

The conflict between Russia and Ukraine has caused a global inflation crisis. Being major importers of oil and gas, the crisis had a big impact on the UK and Europe.

In the UK specifically, a weaker pound has exacerbated inflation as imported goods into the UK have become more expensive.

The UK’s inflation is now the highest in the G7.

As a result, UK real wages have fallen at their fastest rate in 20 years.

Consumer spending has contracted in the face of these headwinds, reducing economic growth significantly. 

Consumer spending is an important part of the UK economy

• higher consumer confidence often leads to increased spending, which in turn boosts business revenues and supports economic growth.
• low levels of consumer confidence can have a negative effect on consumer spending. Consumers may reduce their spending, leading to businesses having difficulty staying afloat.

Growth From Knowledge (GFK), the largest German market research company, said its gauge of UK Consumer Confidence plummeted through 2022, reaching -49 in September 2022, the lowest level since records began in 1974 ^[1]. 

Green shoots appearing in the UK at the start of 2023

The Office for National Statistics reported that the UK narrowly avoided a recession in the fourth quarter of 2022 and returned to growth in January 2023 after posting a month-on-month Gross Domestic Product (GDP) increase of 0.3%^[2].

This coincided with higher than consensus readings in the flash PMI (Purchasing Managers Index), an index which predicts whether the future outlook for the manufacturing and services sectors is likely to be positive or negative ^[3].

This rebound in the UK economy has been partially credited to the return of a full fixture schedule for the Premier League following the suspension of matches to facilitate the FIFA World Cup in December 2022 ^[4] .

Consumer confidence and job market remains robust

Consumer confidence rose to -38 in February 2023, with a further increase to -36 in March 2023 ^[5] . The job market remains robust; unemployment is low at 3.7%, and the average hourly earnings increased 6.7% in the fourth quarter of 2022, providing a strong backdrop for the UK consumer ^[6] .

In addition to higher wages, there was an increase in job participation figures, a metric which has been a problem since Covid. If there is an improving workforce participation, economic growth should follow, and wage inflation pressures should ease.

This pick-up in data seemed to coincide with falling levels of inflation. However, a surprise inflation figure of 10.4% year-on-year reminded investors that the inflation outlook might not be entirely clear ^[7] .

Market participants hope disinflation will gain momentum in the upcoming summer months. Goldman Sachs have revised their inflation forecast, predicting it will drop from current levels of 10.4% in the fourth quarter of 2022 to less than 3% by year-end ^[8].

UK likely to avoid recession

Chancellor Jeremy Hunt gave his first full budget in March 2023. He pledged to

• extend the energy price guarantee for three months
• limit gas and electricity tariffs so the typical household bill is no more than £2,500 a year
• increase funding to support carbon capture and storage projects; a three-year commitment to full expensing, allowing companies to write-off the cost of capital investment against their taxable profits
• extend free childcare to all children from nine months to four years old, a move that should help entice more people back to work.

Crucially, it looks likely the UK will avoid a recession this year. This, coinciding with inflation falling, is positive for the UK.  

Reasons to feel optimistic about the UK economy

Several indicators, including consumer confidence and PMI manufacturing data, show the UK economy is improving, although admittedly from an exceptionally low base. GDP forecasts are improving for this year.

UK energy prices are expected to come down as gas prices fall, and inflation is now forecast to drop from over 10% to under 3% by year-end ^[9].

This combination of data is good news for the UK economy, indicating it is in much better shape than it was just a few months ago.

Although the long-term UK outlook remains uncertain, the short-term is showing the first tentative signs of improvement.