The UK economy expanded at twice the pace expected in May, a sign of the strength that the new Labour government is counting on to fund its ambitious policy plans.
Gross domestic product rose 0.4 per cent month-on-month in May after the flat reading in April, the Office for National Statistics said on Thursday. That compares with the 0.2 per cent pace economists had expected, reflecting the fastest expansion in construction in almost a year.
The figures put Britain on course for another solid quarter of expansion, continuing a recovery from recession that Labour wants to turbocharge with a blitz of growth-boosting policies.
“The economy has performed relatively well since the start of the year,” said Yael Selfin, chief economist at KPMG UK. “Consumer spending is set to be the main driver of activity in the second half of the year.”
Output rose 0.9 per cent in the three months to May compared to the previous three months, the quickest pace in more than two years.
The economy was aided by better weather in May after activity in the retail and construction sectors was dampened by heavy rain in April. Previous data showed retail sales jumped as the UK enjoyed the warmest May on record, according to the Met Office.
“Many retailers and wholesalers had a good month, with both bouncing back from a weak April,” said Liz McKeown, ONS director of economic statistics. “Construction grew at its fastest rate in almost a year after recent weakness, with house building and infrastructure projects boosting the industry.”
The pound slightly rose after the data, up 0.1 per cent to $1.2865, the highest in four months. The currency gained 1.7 per cent so far this month, outperforming all Group-of-10 peers, on hopes of political stability after Labour’s election win and expectations the UK’s interest-rate gap with the US will remain unchanged.
Services output grew by 1.1 per cent in the three months to May, the fastest pace since December 2021. Professional, scientific and technical activities and administrative and support made the largest contributions, while the sector saw growth across the board.
Manufacturing rose 0.4 per cent in the month, reversing part of the 1.4 per cent drop in April.
New Chancellor of the Exchequer Rachel Reeves has vowed to make a sustained pickup in growth a “national mission,” as Labour seeks to generate more money to fund creaking public services. It’s rushing through policies, such as reforms to the onerous planning system, to revive the economy after a misfiring performance under the Conservatives in recent years.
While the figures were from when the Prime Minister Rishi Sunak’s Conservative government was in power, Reeves still declared that a “decade of national renewal has begun,” saying that “we are just getting started.” Prime Minister Keir Starmer has pledged to deliver the fastest growth in the Group of Seven nations, a difficult goal given the UK’s sluggish performance since its exit from the European Union.
After slipping into a shallow recession last year, the UK economy’s prospects have improved in 2024 as wages grow in real terms again following the cost-of-living crisis.
Another quarter of solid growth is unlikely to blow the Bank of England’s plans for interest rate cuts off course. The UK central bank said in June it now expects 0.5 per cent growth in the second quarter, as it also signalled that more rate-setters are close to backing a cut from the highest rates in 16 years.
Growth will beat the BOE’s second quarter estimate of 0.5 per cent if the economy avoids a decline in June. According to the ONS, growth will match the first quarter expansion of 0.7 per cent if the expansion in June is between 0.01 per cent and 0.31 per cent.
Markets currently see a chance just under 50 per cent for a move downwards after the BOE’s next meeting on Aug. 1.
While output was unchanged in a weather-affected April, the numbers for the second quarter will be boosted by GDP starting the period at a higher level following the strong end to the first quarter. June’s figures may also be boosted by consumer spending being driven by the Euros football tournament and Taylor Swift’s blockbuster Eras Tour arriving in the UK.
“The warmest May on record helped stoke a stronger-than-expected recovery in GDP growth, driving activity in consumer-facing sectors like retail as well as supporting construction activity,” said Anna Leach, chief economist at the Institute of Directors. – Bloomberg
