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U.K. Economy Surged Past Pre-Covid Size Before Ukraine War

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The U.K. economy surged at the strongest pace in seven months in January, surpassing levels prevailing before the coronavirus struck.

Gross domestic product rose 0.8%, recovering from a 0.2% fall in December when the omicron variant of the virus was spreading, Office for National Statistics figures Friday show. The gain was much stronger than the 0.1% pace expected by economists.

The increase left output about 0.8% higher than in February 2020, with all parts of the economy expanding. The figures may embolden the Bank of England to raise interest rates for a third time next week to control inflation, which has leaped to its strongest pace in three decades.

It’s also a boost for Chancellor of the Exchequer Rishi Sunak, who’s set on March 23 to deliver a package of measures to protect the economy from a surge in the cost of living. The jump in inflation, fanned by higher energy prices after the war in Ukraine, is pushing up the cost of goods and services of all kinds.

“We have provided unprecedented support throughout the pandemic, which has put our economy in a strong position to deal with current cost of living challenges,” Sunak said in a statement. “Russia’s invasion of Ukraine is creating significant economic uncertainty and we will continue to monitor its impact on the U.K.”

Further gains for the economy are expected in February, when Covid-19 cases fell. However, economic headwinds are mounting, with the surge in energy prices triggered by the war in Ukraine set to deliver a massive blow to living standards this year.

“The emergence of the omicron variant of Covid-19 proved little more than a blip for the U.K. economy, which posted an unexpectedly rapid rebound in January. Growth is on course to exceed the Bank of England’s latest forecast for the first quarter by a huge margin, providing even more reason to lift rates again next week.”

The shock could see inflation soar past 8% in the spring, leading some to warn of a possible recession if oil and gas prices remain elevated.

Services output rose 0.8% in January, reflecting a rebound in retail sales and a surge in hospitality.

After a boom in vaccinations in December, the pace of work in the National Health Service slowed, reducing GDP by 0.1 of a percentage point in January.

Imports of goods excluding precious metals, which can be volatile, increased 11% in January, due to a surge in shipments from the European Union. Exports fell 8.7%, with sales to the EU down sharply. It left the trade deficit at 21.9 billion pounds ($29 billion), the biggest shortfall since at least 1996.

The ONS said the 24% rise in imports from the EU was deemed to be “genuine,” rather than the result of a shift to using customs declarations in January. Previously, the trade was captured using a survey. However, the 21% fall in exports to the EU was strongly affected by changes relating to the assumed departure date of shipments.

The total trade deficit, including precious metals, widened to a record 26.5 billion pounds, more than double the gap economists forecast.