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(Bloomberg) — The UK economy grew for a second month in February, suggesting a recovery from recession is now under way.

Gross domestic product rose 0.1% from January, the Office for National Statistics said Friday, in line with the gain forecast by economists. January’s figure was revised up to show a 0.3% increase.

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The figures add to evidence that the economy is gathering momentum after sliding into a shallow technical recession in the second half of last year amid elevated inflation and interest rates. Many economists expect growth in the first quarter to beat the 0.1% predicted by the Bank of England.

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“While we expect a better economic recovery than most, we doubt it will be strong enough to prevent inflation (and interest rates) from falling much further as appears to be happening in the US,” said Paul Dales, chief UK economist at Capital Economics. “We can safely say that, after lasting just two quarters and involving a total fall in GDP of just 0.4% or so, the recession ended in the fourth quarter.”

Manufacturing jumped 1.2% last month, a much stronger than expected showing, while services expanded by 0.1%. Construction fell 1.9%, held back by wet weather. 

What Bloomberg Economics Says …

“February’s GDP gain leaves the UK economy on course for a solid rebound in the first quarter of 2024. Even so, we remain of the view that the recovery this year will be subdued enough so as not to endanger the progress made on disinflation so far. That should help the Bank of England deliver its first rate cut as soon as June.”

—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT. 

Professional, scientific and technical activities provided the biggest boost to the services sector. Declines in education, health and social work, and the finance sector were drags on the largest part of the economy.

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“The economy grew slightly in February with widespread growth across manufacturing, particularly in the car sector,” said Liz McKeown, ONS director of economic statistics. “Services also grew a little with public transport and haulage, and telecommunications having strong months.”

The pound was little changed after the data, down 0.1% on the day to $1.2537.

The ONS said that companies reported that some supply chains had been impacted by disruption in the Red Sea, particularly in the wholesale trade sector. Both the food and beverage and construction industries also noted the impact of the fourth wettest February on record in England.

The pickup has led investors to scale back bets on how many rate cuts the BOE will deliver this year, despite the headline rate of inflation widely forecast to return to the 2% target this month. They now expect just two — the first of them fully priced in September — after Megan Greene on Thursday became the latest BOE policymaker to warn that reductions are likely still some way off.

The economy will avoid a contraction in the first quarter — unless output falls by 1.3% or more in March, the ONS calculated. 

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Signs of turnaround will be welcomed by Prime Minister Rishi Sunak and support his decision to wait until later in the year to call a general election. Opinion polls put the Tories around 20 percentage points behind the opposition Labour Party.

Chancellor of the Exchequer Jeremy Hunt said the economy was “turning a corner.”

Surveys suggest the housing market and private-sector is picking up. With wages now outpacing prices, living standards are rising once again, and households can expect a significant boost this month when a National Insurance payroll tax cut took effect, the minimum wage rose by almost 10% and domestic energy prices fell to a two-year low.

“Today’s data indicates that the UK’s economic trajectory is on a shallow but steady upward course,” said Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services.

However, the recovery is likely to be modest rather than spectacular 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. 

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“Today’s data confirms once again that the UK economy is stuck on a low-growth treadmill,” said David Bharier, head of research at the British Chambers of Commerce.

For the BOE, the main concern remains the threat from persistent inflation. Markets expect officials to commence rate cuts later than the European Central Bank, which on Thursday signaled it could move as early as June, and around the same time as the Federal Reserve in the US, where a hot inflation reading spurred a major repricing this week. 

Britain’s trade deficit continued to narrow in the three months to February, shrinking by £2 billion to £9.9 billion. That extended a steady improvement since the first quarter of 2022, when the deficit hit a recent low of £26 billion. 

The latest pick-up was driven by a sharper drop in goods imports than the decline in goods exports, suggesting the UK’s trade intensity is falling.

The goods deficit shrank by £3.5 billion to £45.6 billion, but the UK’s long-standing surplus in services also fell, by £1.6 billion to £35.7 billion. The smaller goods deficit was driven primarily by a decline in imports from non-EU countries, which fell by more than the decline in UK goods exports.

—With assistance from Philip Aldrick, Isabella Ward and Aline Oyamada.

(Updates with details on the trade balance.)

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