UK economy enjoys unprecedented boost in January

March 19, 2024

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UK economy enjoys unprecedented boost in January

The UK economy picked up in January, raising hopes it could be on the path to recovery out of the most recent recession.

Official data indicates that the economy expanded by 0.2%, driven by increased sales both in physical stores and online, as well as heightened construction activity. 

The Office for National Statistics (ONS) highlighted the services sector as the primary driver behind this growth. While this assessment is preliminary, it offers insight into the current state of the UK economy, which entered a recession towards the end of 2023. 

The latest figures, released on Wednesday, aligned with economists' expectations, with some experts suggesting a potential turning point for the economy following the recessionary period. 

In January, the services sector, encompassing various industries such as hospitality and hairdressing, saw a 0.2% growth, primarily fueled by robust performance on the High Street and increased spending in supermarkets. 

This improvement contrasts with December's 0.1% decline, attributed to retailers' struggles to attract customers who had already taken advantage of pre-Christmas sales. Department stores and shops selling household goods and sports equipment experienced a surge in sales due to January promotions.

However, over the three months leading to January's conclusion, the production sector, including manufacturing, experienced a 0.2% decline, while services remained stagnant. Additionally, ongoing industrial disputes within the NHS and rail industry likely contributed to subdued growth. 

Factors such as reduced consumer spending, healthcare strikes, and decreased school attendance contributed to the recession at the close of 2023. 

With a contraction of 0.3% between October and December, following a previous decline between July and September, the UK officially entered a recession, defined as two consecutive quarters of economic contraction. 

Prime Minister Rishi Sunak had prioritised economic growth among his key pledges amid challenges posed by rising prices and interest rates. 

Generally, sustained growth in gross domestic product (GDP) is favoured by economists, politicians, and businesses, as it typically signifies increased consumer spending, job creation, higher tax revenues, and improved wages for workers.

Japan raises interest rates for first time in 17 years

Japan's central bank has raised the cost of borrowing for the first time in 17 years as it looks to combat rising inflation.

The Bank of Japan (BOJ) has raised its key interest rate from -0.1% to a range of 0% to 0.1%, a move spurred by a surge in wages following an uptick in consumer prices. 

This adjustment contrasts with the bank's decision in 2016 to reduce the rate below zero in an effort to invigorate the country's sluggish economy. With this increase, there are now no remaining countries with negative interest rates. Negative rates entail individuals paying fees to deposit money in banks, serving as an incentive for spending rather than saving.

The BOJ has also discontinued its yield curve control (YCC) policy, which involved the purchase of Japanese government bonds to regulate interest rates. 

Despite being implemented since 2016, YCC faced criticism for distorting markets by suppressing long-term interest rates. Anticipation for a rate hike had been mounting since Governor Kazuo Ueda assumed office in April of the previous year.

Official data indicated that while the pace of price increases has slowed, Japan's core consumer inflation maintained the bank's 2% target in January. The decision to raise rates was influenced by major corporations in the country increasing wages for their employees to offset the rising cost of living, as noted by Nobuko Kobayashi from consulting firm EY-Parthenon in conversation with the BBC.

Earlier this month, Japan's largest companies agreed to implement a 5.28% salary increase, marking the most substantial wage hike in over three decades. Wage growth had stagnated since the late 1990s despite modest or negative consumer price growth. However, the resurgence of inflation brings both positive and negative implications for the economy.

In February, Japan's primary stock index, the Nikkei 225, achieved an all-time closing high, surpassing the previous record set 34 years ago.

Additionally, the country avoided slipping into a technical recession this month following revisions to its official economic growth figures. The revised data indicated a 0.4% increase in gross domestic product (GDP) in the final three months of 2023 compared to the previous year.

Eurozone monthly trade surplus rises to record high

The eurozone achieved a historic monthly trade surplus at the beginning of the year, propelled by a significant decrease in energy import costs and an increase in exports. 

On a seasonally and calendar-adjusted basis, the trade surplus for goods in the single currency area reached €28 billion in January, marking its highest level since Eurostat began monitoring the data in 2002. 

This rebound, mirroring a similar improvement in Germany's trade balance, signals positive developments for the European economy, highlighting the reversal of the substantial terms of trade shock triggered by Russia's invasion of Ukraine. In contrast to the record €335 billion trade deficit faced in 2022 due to soaring natural gas and oil prices, the eurozone recorded a surplus of €64 billion last year.

The recent decline in oil and gas prices contributed to a one-third reduction in energy imports for the eurozone in the year leading up to January. 

January witnessed a 2.1% increase in eurozone exports compared to the previous month, driven by growth in shipments to most major markets, except the US. Conversely, imports into the bloc dropped by 4% month-on-month in January, with significant declines observed in shipments from various markets including Asia, the US, and OPEC members.

The eurozone's trade balance with China, a politically sensitive issue, improved to a deficit of €10.6 billion in January, marking its lowest level in three years. This improvement was attributed to a sharp monthly decrease in shipments from China and marginal growth in exports to China.

However, concerns have arisen regarding the future of European carmakers due to a recent surge in imports of inexpensive Chinese electric vehicles. In response, Brussels initiated an anti-subsidy investigation on imported EVs from China last year, following their notable market share increase in Europe from 1% in 2019 to 8% presently.

The most notable growth in EU exports over the past year was a 10% increase in shipments to Japan, accompanied by 8.5% growth in exports to the US and 2.5% to the UK. Conversely, exports to China experienced a 3% decline during this period.

Germany played a significant role in the eurozone's improved trade balance, reporting an overall trade surplus of €27.5 billion in January, its highest in over six years. Germany's trade surplus with non-EU countries also saw an increase, reaching €12.9 billion.

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