UK economy surges 0.8% in January, strengthening case for rate hike

Britain's economy bounced back far more sharply than anyone had predicted in January, according to official figures released Friday, adding fresh momentum to the case for raising interest rates again next week. The Office for National Statistics reported that gross domestic product expanded by 0.8 percent month-on-month, the strongest monthly jump since June and nearly four times larger than the 0.2 percent growth that economists surveyed by Reuters had anticipated. December had seen a slight contraction of 0.2 percent as the Omicron wave kept people home and businesses shuttered. The January rebound suggested that constraint was lifting.

Every major sector of the British economy contributed to the surge. Retail and wholesale trade led the way, alongside pubs and restaurants—the hospitality venues that had borne the heaviest weight of pandemic restrictions. The breadth of the recovery mattered. It was not a single industry pulling the numbers up; it was the economy itself finding its footing again.

Yet the moment of optimism came shadowed by larger forces. Inflation was climbing steeply, and Russia's invasion of Ukraine had upended global energy markets and supply chains in ways that were only beginning to register. Finance Minister Rishi Sunak acknowledged the uncertainty, warning that the conflict warranted careful attention to the economic outlook. The pound barely moved on the growth news—investors were watching Ukraine, not January's retail figures.

Economists were already bracing for harder times. Paul Dales, chief UK economist at Capital Economics, said plainly that this strong month might represent the best the year had to offer. The cost-of-living crisis and the war's ripple effects would likely constrain growth ahead. The Bank of England's own forecasts, made just weeks earlier, had already been overtaken by events. The central bank had projected 3.75 percent growth for the year and inflation peaking around 7.25 percent in April, but those numbers looked quaint now.

The strength of Friday's data, combined with soaring prices, made it nearly certain that Bank of England policymakers would raise interest rates again next week—the third consecutive monthly increase. But the British Chambers of Commerce pushed back hard against that path. Suren Thiru, the organization's head of economics, warned that tightening monetary policy while raising taxes would undermine confidence and squeeze both household finances and business investment precisely when the economy needed support.

There was another complication in the figures: Britain's trade deficit had widened dramatically. The goods trade shortfall hit a record 21.9 billion pounds in January, up from 14.7 billion pounds in December, driven largely by a sharp widening in the deficit with the European Union. Part of that swing reflected a post-Brexit shift in how trade data was collected—about 2 billion pounds of the 3 billion pound drop in exports to the EU was a one-off statistical adjustment. But customs officials said the 4.7 billion pound rise in imports from the EU was mostly genuine, including a 2 billion pound increase in vehicle imports as domestic car production remained constrained. Trade with non-EU countries held steady.

When stripped of the distortions, the picture was more complicated than the headline growth number suggested. The British economy in January was 0.8 percent larger than it had been in February 2020, before the pandemic struck. But it remained about 4 percent smaller than it would have been if it had simply continued growing at its historical trend. Strip out the extra spending on healthcare during the crisis, and the economy was still roughly 1.2 percent below its pre-pandemic trajectory. The rebound was real, but the gap remained.