UK Economy Surges Unexpectedly, Bolstering Case For Rate Hike Next Week

Britain's economy rebounded much more than expected in January from its coronavirus-related lull in late 2021, according to data on Friday, raising - along with soaring inflation - the likelihood of an interest rate hike next week.

The Office for National Statistics said gross domestic product grew by 0.8% month-on-month in January after a 0.2% decline in December when the Omicron wave of coronavirus held back growth. This was the strongest monthly expansion since June and more than forecast by any economist in a Reuters poll which had pointed to growth of 0.2%.

All the main sectors of Britain's economy grew more than expected, with the wholesale and retail sector as well as pubs and restaurants being particular drivers, the ONS said.

While growth looked likely to continue into February, economists warned of tougher times ahead.

"The cost of living crisis and the influence of the war in Ukraine probably means this is as good as it gets for the year," said Paul Dales, chief UK economist at consultancy Capital Economics.

Responding to the data, finance minister Rishi Sunak warned that the Russia-Ukraine conflict had raised uncertainty around the economic outlook and that it warranted vigilance.

With investors focused on the consequences of the conflict in Ukraine, the pound showed little reaction to the January growth figures.

The size of the British economy in January was 0.8% larger than its pre-pandemic level in February 2020 but remained about 4% smaller than if it had continued growing at its trend rate for the last decade, according to a Reuters calculation.

GRAPHIC: UK economy trend

The ONS said output would be around 1.2% below its pre-pandemic size if extra spending on healthcare was stripped out.

Last month the Bank of England said the economy looked set to grow around 3.75% this year, with inflation peaking at around 7.25% in April - but those forecasts have already been eclipsed by the inflationary consequences of Russia's invasion of Ukraine for financial markets and international trade.

Still, the strength of the economy shown in Friday's data - in addition to galloping inflation - will likely bolster bets that BoE policymakers will raise interest rates next week for the third time in the space of three months.

The British Chambers of Commerce (BCC) warned this could prove to be a mistake.

"Raising interest rates and taxes at this time would weaken the UK's growth prospects further, by undermining confidence and diminishing households' and firms' finances," BCC head of economics Suren Thiru said.

Britain's goods trade deficit, excluding volatile flows of precious metals, rose to its widest on record in January at 21.9 billion pounds ($28.6 billion), up from 14.7 billion pounds in December, driven by a sharp widening in the trade deficit with the EU.

Part of the increase was due to a post-Brexit change in how data on trade with the EU was collected. Around 2 billion pounds of a 3 billion pound fall in goods exports to the EU in January was a one-off effect related to this, the ONS said.

Customs officials said a 4.7 billion pound rise in imports from the EU was "predominantly" the result of a genuine shift, such as a 2.0 billion pound rise in imports of transport equipment - mostly cars - due to reduced domestic production.

Trade with non-EU countries was little changed from December.

($1 = 0.7658 pounds)