UK economy grows by 0.4% in May

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The UK economy grew by 0.4 per cent in May, double the expected figure, driven by continued expansion in the key services sector and a rebound in housebuilding.

The month-on-month rise followed zero growth in April, the Office for National Statistics said on Thursday, and exceeded a 0.2 per cent forecast for May by economists polled by Reuters.

The figures provided welcome news to the new Labour government after it declared growth was its “national mission”.

The stronger than expected growth “will be welcomed by the new chancellor,” said Ashley Webb, economist at Capital Economics. “Indeed, the improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate.”

Webb said the rise in gross domestic product in May was the fourth increase in the past five months, “which supports the idea that the dual drags on activity from higher interest rates and higher inflation are starting to fade”.

Chancellor Rachel Reeves said after the figures were released: “This week I have already taken the urgent action necessary to fix the foundations of our economy to rebuild Britain and make every part of Britain better off. A decade of national renewal has begun, and we are just getting started.”

Line chart of GDP index, 2019=100 showing UK GDP is estimated to have grown by 0.4% in May

Labour, which swept to power in last week’s general election, is hoping that planning reforms will help lift an economy that has underperformed many of its peers since the pandemic.

The strong growth in May suggests the quarterly expansion might exceed the Bank of England’s forecasts, easing pressures on policymakers to start cutting interest rates in August from their 16-year high of 5.25 per cent.

“Stronger services consumption raises the risk that service CPI inflation will remain too strong for the Bank of England to cut [interest rates],” said Tomasz Wieladek, chief European economist at T Rowe Price. “The data today make a cut in August less likely. It is becoming more probable that the bank only cuts once this year.”

Traders in swaps markets remained evenly split on the chances of the Bank of England keeping rates on hold and cutting them at its August meeting.

Sterling rose 0.1 per cent against the dollar to $1.2857 as the figures brought the UK’s annual GDP growth to 1.4 per cent, higher than the 1.2 per cent economists had forecast. 

Labour took office against a backdrop of GDP per capita levels still 1 per cent below its fourth-quarter 2019 level, before the pandemic, reflecting the hit of Covid-19 restrictions and the cost of living crisis.

However, the economy bounced back from last year’s technical recession in the first quarter of 2024 with strong growth of 0.7 per cent, the fastest expansion in the G7 group of advanced economies. Last month, the BoE said it expected the solid growth seen at the start of the year to continue in the second quarter for which it forecast an expansion of 0.5 per cent, up from the 0.2 per cent expected in May.

Growth in May was driven by the services sector, which grew by 0.3 per cent in May and registered the fastest growth over three months since December 2021, when Covid-19 restrictions were still in place. Manufacturing production was up 0.4 per cent in May and construction rebounded 1.9 per cent following a sharp contraction in April, when wet weather hit activity.

Rainfall in April was 155 per cent of the long-term average for the month while May was the warmest since records began in 1884, according to the Met Office.

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