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The week ahead 13 March 2023 - Distortions flatter the UK GDP figures

13 March 2023

What to watch out for in the UK economy and property market this week.

Last week saw UK GDP figures that were superficially upbeat, with 0.3% month-on-month growth in January versus a consensus forecast of 0.1%. However, the increase largely reflected less strike action in January compared to December, plus other one-off distortions. The industries that drove services sector growth were transport, education and healthcare, which saw December strikes, so were lifted by more working days in January. The major services industries of finance, IT, the professions and science essentially flatlined. Beyond services, manufacturing saw a fall in output of -0.4%, despite easing supply chain problems, and construction activity declined. Overall, once all the data distortions are taken into account, the UK economy looks flat to weakening.

Figures from the Eurozone similarly pointed to a subdued economy. GDP growth for Q4 2022 was revised down slightly from 0.1% to zero. This reflected cuts in growth for Italy, Ireland and Germany. Worth noting was the -0.9% fall in Euro Area household consumption – the biggest decline since the bloc was created – as consumers felt the pressure from rising interest rates. This is particularly a concern given the ECB is expected to raise rates again this Thursday. The Bank of England also makes its rate decision this week. In the US, the February labour market data was a mixed bag as payrolls were ahead of forecasts, but the unemployment rate also increased. With growth stagnant but core inflation ‘sticky’, the likelihood has grown that central banks will announce more rate hikes this year than previously supposed.

This Wednesday sees the UK Chancellor deliver his Budget speech. The Week Ahead is written on a Friday, so this note ‘went to press’ before any pre-Budget leaks that might have appeared in the weekend newspapers. However, we expect the Chancellor to resist pressure to reverse the upcoming rise in Corporation Tax in favour of continued relief for business investment. There have also been media reports that ten new investment zones may be announced, a policy first announced under the Truss administration but then scaled back.

Things to watch for this week

Tuesday 14th March

UK Unemployment Rate, January

Previous: 3.7%
Forecast: 3.8%

While the labour market has held up well so far in this downturn, we believe the combination of a slowing economy and rising layoffs will cause the unemployment rate to edge up.

US Inflation, February

Previous: 6.4%
Forecast: 6.2%

We expect lower energy prices to continue to push down headline inflation, although the markets will be closely watching core inflation, which excludes energy and food, to see if disinflation is spreading to other prices.

Thursday 16th March

Bank of England Rate Decision, March

Previous: 4.0%
Forecast: 4.0%

We suspect the Monetary Policy Committee will stick to its previous pledge to monitor the data for a while, given the Governor queried swap pricing recently. However, a hike to 4.25% is a growing possibility now, perhaps at the May meeting.

ECB Rate Decision, March

Previous: 3.0%
Forecast: 3.5%

Disappointing core inflation figures for February means another hike from the ECB to 3.5% is a near certainty. We see the refinancing rate increasing again to 4.0% at the following meeting in May.

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