"The latest data may give the Bank of England pause for thought on raising interest rates again at their next meeting"
UK GDP is estimated to have shown no growth in February, as falls in services and production were offset by growth in construction, the latest figures from the ONS show.
This follows growth of 0.4% in January and means that overall, GDP grew by 0.1% in the three months to February 2023.
The services sector fell by 0.1% in February, after growing by 0.7% in January. The largest contributions to the fall in services output came from education and public administration and defence, where industrial action took place in February.
Derrick Dunne, chief executive of YOU Asset Management, commented: “After a surprise 0.3% jump in January, GDP for February came in flat.
“It’s clear we’re not out of the economic woods yet – far from it. Alongside today’s release, the big news this week from the IMF has been that the UK is set to be the worst-performing major economy with a 0.3% contraction in 2023 overall. This clearly isn’t a good indication for investors.
“There will be light at the end of the tunnel if inflation – and in turn, interest rates – become more stable in the coming months as expected, but the effects could take some time to feed through."
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: "Reading the tea leaves of economic growth has been more challenging than ever, in large part due to disruption from intermittent industrial action. Today’s GDP figures could have easily been a few tenths of a percentage point in the other direction, revealing economic decline or, as expected, growth, instead of stagnation at 0%. The metrics have surprised multiple times in the past few months.
"What we have seen consistently however, is that such minute GDP divergences make big splashes across headlines but amount to little change for the general population. Inflation-lagging wages and persistent price increases – including the exorbitantly high rate of food inflation – will continue to concern families far more than on what side of zero economic growth currently stands.
"However, given the dire forecasts only a few months ago, the economy’s resilience is welcome – especially as it provides the Bank some crucial breathing space in light of last month’s unexpected jump in inflation. But respite may be short, with the IMF predicting the UK will still fall into a recession – albeit shallow – this year."
Rob Clarry, investment strategist at wealth manager Evelyn Partners, added: “While the UK economy has surprised on the upside at the start of this year, the latest data may give the Bank of England pause for thought on raising interest rates again at their next meeting on 11 May. Financial markets currently assign an 80% probability of a 25-basis points hike – but will extensive strike action become a factor for consideration on the monetary policy committee?
“The MPC will also need to weigh better-than-expected economic activity in January against the tightening that has already taken place: interest rates have increased by more than four percentage points in last than 18 months, one of the fastest tightening cycles on record.
“Until recently, economists have applied the rule of thumb that it takes around 12-24 months for the full impact of interest rate hikes to be felt by the real economy. Although new research finds that the transmission mechanism – the process through which asset prices and the economy are affected by interest rates – has shortened to around six months. This would be a good thing for the UK economy, as it implies that a good chunk of the impact has already been experienced. Either way, it looks like we are closing in on the end of the UK hiking cycle.
“Looking forward, activity could pick up in the second half of the year as lower energy bills and inflation feed through. But in the meantime, we expect growth to remain sluggish as the economy contends with restrictive monetary policy.
“UK economic activity remains weak: from an investment standpoint, we remain wary about exposure to the domestic economy given subdued growth and the delayed impact of higher interest rates.”
