The UK economy rebounded in January, registering modest growth after falling into a technical recession in the second half of last year.

Gross domestic product rose 0.2% following a 0.1% decline in December, the Office for National Statistics said on March 13. Services and construction delivered the gains, offsetting a drop in industrial production.

The figures leave Britain on track to grow over the first quarter as a whole, bringing the recession to an end. That’s a boost for Prime Minister Rishi Sunak, who is seeking to defy opinion polls that suggest his Conservative Party is facing a heavy defeat at a general election expected later this year.

“The economy picked up in January with strong growth in retail and wholesaling,” said Liz McKeown, director of economics at the ONS. “Construction also performed well with house builders having a good month. These were partially offset by falls in TV and film production, lawyers and the often-erratic pharmaceutical industry.”

What Bloomberg Economics Says …

“The mild recession that hit the economy at the end of last year is over. Growth is on course to pick up in the first quarter of the year, and we’re revising up our call for 1Q24 to 0.2% from a fall of 0.1% as a result. Recent communication had suggested the Bank of England is in no hurry to ease policy, and signs of a rebound give it cover to wait a little longer for confirmation that inflation is on course for a durable return to 2%. We’re shifting the timing of the first rate cut back to June from May. — Ana Andrade and Dan Hanson, Bloomberg Economics.

However, the recovery is likely to be modest as past interest-rate increases continue to feed through to households and companies. Analysts expect the UK to trail every other Group of Seven country except Germany for another year.

With the labor market cooling and data this week expected to show a sharp slowdown in inflation, investors are betting the Bank of England will begin cutting rates in August from their highest level in 16 years. Markets are now pricing in four quarter-point reductions over the next year.

The pound was steady at around $1.28 after the release. It rose to as high as $1.2894 last week on signs the UK economy was holding up better than many feared. Sterling is the best performing currency across Group-of-10 peers this year, as the BOE is seen holding interest rates higher for longer given growth is rebounding.

“The economy may be turning a corner,” said Ben Jones, lead economist at the CBI, the nation’s biggest employers group. “Momentum is likely to remain weak in the near-term, but the outlook for this year is improving.”

Growth in January was boosted by strong retail sales as a 2 percentage point cut in national insurance, a payroll tax, took effect and lifted disposable incomes.

Households, which already are enjoying the return of real wage growth, can expect a further lift in April after Chancellor of the Exchequer Jeremy Hunt announced another 2-point cut in National Insurance Contributions in his budget last week. Workers on the minimum wage will also get an uplift of almost 10%.

“We are making progress in growing the economy — part of which makes it possible to bring down national insurance contributions by £900 this coming year,” Hunt said in a statement after the report. “But if we want the rate of growth to pick up more we need to make work pay, which means ending the unfairness of taxing work twice.”

Weighing on growth in January was strike action by junior doctors, which contributed to the highest number of days lost to industrial action since September.

Retail rebounded strongly from a disappointing December, growing 3.4% in January, which drove the growth in services for the month. Car repairs also drove the improvement in services.

Health spending grew 0.9%, mainly in private health care, while professional services had a slow month and saw activity drop 0.9%. Education grew by 0.7%.

Construction grew 1.1% in the month, beating economists forecasts, due to private housebuilders resuming work after Christmas shutdowns.

Within industrial production, water supply and sewerage drove a decline. Manufacturing and energy supply made no contribution.

The trade deficit widened by £2.2 billion ($2.8 billion) to £13.8 billion in the three months to January, roughly in line with the quarterly deficits across last year. The slightly larger deficit was due to a “substantial fall in services exports,” which was offset in part by a smaller deficit in goods.

Goods exports fell but imports fell by even more, the ONS said. It added that there was no evidence that disruption to shipping in the Red Sea affected imports in January.

The UK continues to be increasingly dependent on imports of goods from the EU, which were £5.8 billion higher than those from non-EU countries in the month of January, the ONS said. Imports from non-EU countries have been declining steadily since October 2022. Exports of UK goods to the EU and to no-EU countries remained roughly the same in the month.

“The technical recession that the UK slipped into late last year will be short-lived,” said Sanjay Raja, Deutsche Bank’s chief UK economist. “We should see growth gradually return to its trend rate over the course of the year as sentiment continues its uptrend and fiscal and monetary policy loosen through 2024.”