GDP bounces back in January despite construction sector weakness

The UK economy rebounded in January, as the underlying strength of the services sector helped offset weakness in construction and production.

Gross domestic product rose 0.5% month-on-month in January, beating forecasts and marking a return to positive territory following December’s 0.4% decline

Quarterly growth was 0.2%, in line with expectations, while on an annual basis, year-on-year growth was 1.4% compared to 1% in December.

The main driver came from the services sector, which improved by 0.5% in three months to January. Production and construction contracted by 0.8% and 0.6% respectively during the same period.

On a monthly basis, services improved 0.3% in January, compared to a 0.2% fall in December, while production grew 0.6% against a 0.5% decline a month earlier. Construction reversed a 2.8% fall in December to rise 2.8%.

Rob Kent-Smith, head of GDP at the ONS, said: “Across the latest three months, growth remained weak with falls in the manufacture of metal products, cars and construction repair work all dampening economic growth. These were offset by strong performances in wholesale, IT and health services.

“This sluggish growth came despite the economy bouncing back from a weak December.”

Rupert Thompson, head of research at Kingswood, said the data would provide “some reassure that the UK economy is not heading into a Brexit hole”.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Consumers aren’t letting the Brexit storm clouds stop them from spending more when their real incomes are growing at a healthy rate. Note that the three-month on three-month growth rate of services output increased by one tenth to 0.5% in January, matching its post-referendum average [and] highlighting that the recent slowdown has been concentrated in the construction and industrial sectors.”

Pantheon revised its forecast for quarter-on-quarter growth in the first three months of the year, to 0.3% from 0.2%, following the publication of the January data.

“This implies that little, if any, excess capacity will open up in the first half of the year, giving the Monetary Policy Committee little time to delay another rate hike if, as we expect, GDP growth regains some momentum once a Brexit deal has been signed off,” Tombs said.

Naeem Aslam, chief market analyst at ThinkMarkets, said: “The GDP data provided an extra boost for sterling, which is already up on the Brexit deal hopes. However, the devil is in the detail, because the new construction orders fell but the increase in the industrial output and manufacturing have balanced the overall equation. Now the focus will be on the Brexit related news and this will remain the denominator for the price.”

As at 1000 GMT, sterling was trading flat at 1.17 against the euro and down against the dollar at 1.3147 ahead of the big Brexit vote on Tuesday evening.