UK Economy Grinds to a Halt in January, Data Shows, Placing Spotlight on Treasury

- UK economy grinds to a halt in January as Boris Bounce elusive.

- Three month growth rate clings to 0% for third consecutive month.

- After BoE responds to virus threat, slashes Bank Rate to 0.25%.

- Ahead of Gov's maiden budget, amid further stimulus expectations.

- BoE and Treasury in coordinated response to virus threat to growth.

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The UK economy ground to a halt in January, Office for National Statistics data revealed on Wednesday, raising pressure on government to support growth in its first budget due to be announced later in the morning. 

UK monthly GDP growth fell to 0% in January, down from 0.3% in December and when consensus had been looking for a 0.2% expansion. This left the three month growth rate at 0% for a third consecutive month and reduced the annualised pace of expansion to just 0.6%, down from 1.2% in December. 

Britain’s economy stalled after growth in services, manufacturing and agriculture was offset by contractions in industrial production and construction in January. However, the services and industrial sectors have weakened on a rolling three-month basis, contributing nothing to GDP over the last quarter while leaving the construction sector to do the heavy lifting. 

The data may come as a disappointment to economy watchers who’d hoped January would bring further signs of a post-election ‘Boris Bounce’ in activity, and suggests that growth momentum had continued to fade before the coronavirus threat ever even appeared on the radar.

This is after GDP grew by 0.3% in December, averting a quarterly contraction and persuading the Bank of England (BoE) to leave Bank Rate unchanged in January pending further information on the economy''s performance. 

“Activity has not rebounded as business surveys implied,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. “In response to signs of continued underlying weakness, we are revising down our forecast for quarter-on-quarter growth in Q1 to just 0.1%, from 0.3%. This assumes month-to-month growth in GDP of 0.2% in February, followed by a 0.5% decline in March, driven by a plunge in discretionary services spending. At this stage, we look for a 0.3% quarter-on-quarter drop in GDP in Q2, followed by a rebound in Q3.” 

The BoE cut Bank Rate back to its record low of 0.25% from 0.75% on Wednesday and announced a range of other measures to support the economy as it grapples with the coronavirus that’s infected close to 400 people including a government health minister. But had it not been for the virus threat, Wednesday’s GDP data might have eventually elicited a BoE rate cut anyway given that it warned in January that it would act should the economy underperform its forecasts. 

Annualised GDP growth of 0.6% in January was far below the BoE’s estimate of the UK's inflation producing rate of expansion, which was downgraded to 1% in January, and could mean the BoE will continue to miss its 2% inflation target without offsetting stimulus to get the economy growing faster. Inflation rose from 1.4% to 1.8% in January but has been below the 2% target since July 2019 and has spent little time at or above the target in recent years. 

The GDP data and BoE rate cut came ahead of the newly elected government’s maiden budget, due at 11:30, and markets have been briefed to expect a large investment program as well as a package of measures aimed at supporting the economy through the coronavirus outbreak. The economy grew by 1.4% last year but consensus was for it to slow to 1.1% in 2020 before coronavirus and efforts to contain it began threatening the UK and global outlooks. 

Coronavirus has seen draconian restrictions on the movement of people imposed in China and Italy, threatening a sudden stoppage of those economies in at least the first quarter. And with the viral pneumonia spreading across much of Europe and more than half the world's countries, the idea of such measures being implemented in other major economies can no longer be ruled out. 

“UK policymakers are taking the necessary steps today to deliver a coordinated monetary and fiscal stimulus. While the BoE’s timing has been a slight surprise, the policy action is in line with our earlier analysis. That the BoE chose to announce its stimulus on the same day as the budget is telling. Policymakers are clearly concerned about the risks ahead. The joint action reflects the intention to send a big message that policymakers are prepared to take aggressive and pre-emptive steps to support the economy,” says Kallum Pickering, an economist at Berenberg.