Growing signs UK has avoided 'double dip'

The economy has avoided a "double dip" recession and has returned to more robust growth, the latest official data suggests.

The Office for National Statistics' latest estimate of activity in the service sector – comprising some 75 per cent of the economy – shows a 1.3 per cent rise in output in January, having fallen 1.1 per cent in December – a "bounce back" from the effects of the snow and cold weather in winter.

Some of the sectors hardest hit by the snows, such as hotels, restaurants and distribution, saw a rebound in output less than the decline seen in December, which some economists believe means that the "bounce back" will sustain into February. Others, though, point to downbeat signals in surveys of business sentiment from the Chartered Institute for Purchasing and Supply and the Bank of England.

Coupled with much faster growth in manufacturing, analysts say that the available evidence across the economy so far may indicate a growth rate for first quarter GDP as high as 0.8 per cent, or 3.2 per cent on an annualised basis. This would more than correct the 0.5 per cent contraction in the last quarter of 2010, and avoid two successive quarters of falling output, the conventional definition of a recession, and thus avert a "double dip".

Given the uncertainties, however, most observers believe that the Bank's Monetary Policy Committee will keep rates on hold next week: May is regarded as the "crunch" session, by which point an ONS estimate for GDP over January to March will be available, and the outlook in the eurozone may be clearer. The latest data on wage growth, meanwhile, also suggests some tightening in the labour market – a key consideration for the Bank.

The Office for Budget Responsibility slashed its growth forecast for 2011, from 2.1 to 1.7 per cent, leading to fears that the Chancellor's fiscal strategy is in jeopardy; such worries may, for the moment, be allayed.

Michael Saunders, an economist at Citibank commented: "Using available data for industrial production, services and construction output in early 2011, at this stage, our forecast is for first quarter growth of 0.6 per cent to 0.8 per cent. Obviously, this forecast may be refined as data emerges."