(Bloomberg) -- The UK economy grew for a second month in February, adding to evidence that the shallow technical recession at the end of last year is already over and that a recovery is underway.

Gross domestic product rose 0.1% from January, the Office for National Statistics said Friday, in line with the gain forecast by economists. January was also revised to show a 0.3% increase, up from the previous 0.2%.

“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,” said Paul Dales, chief UK economist at Capital Economics. 

Such growth remains within the margins needed to avoid driving up prices and will likely keep the Bank of England on course for rate cuts in the coming months, according to Bloomberg Economics. That’s good news for Prime Minister Rishi Sunak and will bolster his decision to wait to call an election, with his Conservatives trailing the opposition Labour Party by about 20 points in polls. 

The pound slumped 0.5% to its lowest since November.

The data follows days of market whiplash over the outlook for easing in the UK, after an unexpectedly hot inflation print in the US and hawkish comments by BOE policymaker Megan Greene prompted investors to pare back expectations for cuts. They now expect two 0.25-percentage point cuts this year — down from three earlier in the month — with the first of them fully priced in for September.

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. 

Friday’s GDP data mean the UK will avoid another contraction in the first quarter unless output falls by 1.3% or more in March, according to the ONS. Many economists expect growth this quarter to beat the 0.1% predicted by the central bank. Chancellor of the Exchequer Jeremy Hunt said the economy was “turning a corner.”

The numbers were driven by a much stronger than expected 1.2% jump in manufacturing, led by the car sector, the ONS said. Services expanded by 0.1% while construction fell 1.9%, held back by wet weather.  

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.

Investors are facing conflicting signals across the Atlantic and are weighing whether European central banks might start cutting interest rates before the Federal Reserve. While the US consumer price index has surprised on the upside, the headline rate of inflation in Britain is widely forecast to return to BOE’s 2% target this month. 

Ahead of the GDP data, Goldman Sachs economists said they expected the BOE to lower interest rates four times this year instead of five, in quarter-point increments starting in June. They also expected four cuts next year, with one more to follow in 2026.

Bloomberg Economics predicts five rate cuts this year starting in June, followed by four in 2025, leaving the benchmark rate at 3% at the end of next year.

Surveys suggest the housing market and private-sector are 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.

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  in the US, where a hot inflation reading spurred a major repricing this week.

Meanwhile, Britain’s trade deficit continued to narrow in the three months to February, 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 UK’s recovery is being held back by past interest-rate increases , which 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. 

“It’s a pretty flat economy,” former Bank of England rate setter Michael Saunders told Bloomberg Radio on Friday. “I think that’s going to be the picture for much of the rest of this year, as well.”

--With assistance from Philip Aldrick, Isabella Ward, Aline Oyamada and James Hirai.

(Updates with market moves in fourth paragraph.)

©2024 Bloomberg L.P.