The UK's lagging economy shows some signs of recovery

Britain is the only Group of Seven economy still smaller than before the coronavirus pandemic

Britain's economy, which had seemed certain to fall into recession in early 2023, has shown some unexpected signs of recovery, raising questions about whether the Bank of England really is about to pause its run of interest rate increases.

Bounces in measures of business activity and consumer confidence and a pickup in tax revenues have led some analysts to upgrade their forecasts for the economy this year, although any growth is likely to be weak.

JP Morgan last week raised its projection for gross domestic output growth in 2023 to 0.4% from a previous estimate of 0.1%. That compares with the Bank of England's (BoE) forecast, made in early February, for a contraction of 0.5%.

Britain is the only Group of Seven (G7) economy still smaller than before the coronavirus pandemic. In January, the International Monetary Fund said it would be the only G7 country to shrink in terms of gross domestic product this year.

Below is a summary of recent gauges of the economy and how investors have increased their bets on future BoE rate hikes.

BUSINESS SURVEY REBOUNDS

The preliminary reading of the S&P Global/CIPS UK Composite Purchasing Managers' Index beat all forecasts in a poll of economists, jumping to 53.0 in February from 48.5 in January, above the 50 threshold for growth for the first time since July.

"The report poses a clear challenge to the BoE's central view that a long recession and rise in unemployment will bring inflation down such that further rate increases are not required," said JP Morgan economist Allan Monks.

CONSUMER CONFIDENCE JUMPS

Britons turned more upbeat about their personal finances and the outlook for the economy this month, according to market research firm GfK's gauge of consumer confidence. It rose by the most in almost two years in February.

TAX REVENUES SHOW SURPRISING STRENGTH

Public finances data last week showed a surplus rather than a deficit as expected by most economists polled, helped by the strongest January income tax revenues in records going back to 1999, and buoyant corporation tax income too.

BANK OF ENGLAND RATES DILEMMA

The British central bank signalled on Feb. 2 it was getting close to slowing or pausing its run of interest rate increases after some measures of inflation pressure eased and the economy looked set to go into recession.

Since then, however, the improvement in the economic data has prompted investors to increase their bets on the Bank Rate, which currently stands at 4.0%, rising to 4.25% next month and 4.5% in May, with a one in three chance of hitting 5% in August.

UK AS G7 LAGGARD

Despite the improvement signs, Britain lags its peers in terms of its recovery from the pandemic. Data to the end of 2022 shows Britain is the only G7 economy yet to recover its level of the end of 2019. Economists say that reflects the pandemic's big impact on the country and problems relating to Brexit.