Surprise as ‘resilient’ UK economy grows by 0.1% in May
Experts have reacted with surprise after the ‘resilient’ UK economy defied expectations with 0.1% growth in May.
However, they have warned that it is unlikely to be enough to pave the way for interest rates to be cut.
May’s growth was a welcome boost following a 0.1% decline in April.
Lindsay James, investment strategist at Quilter, said: “The conflict in the Middle East has already left a significant mark on the economy, and while today’s GDP print is better than expected, there is still a risk that the fallout is far from over.
“While the ceasefire announced earlier this summer briefly improved sentiment, renewed tensions and ongoing disruption have exposed how fragile the situation remains.”
Jeremy Batstone Carr, European strategist, Raymond James Wealth Management, said: “While activity showed a 0.1% increase, the detail within the data confirms a divergent performance between the service sector and industrial output.
“Broadly, today’s data conforms with the signal sent by monthly survey evidence: that household consumption, although adversely impacted by higher petrol prices and subdued confidence associated with Iran War-related uncertainty, trod water.
“In contrast, industrial production, which had performed comparatively well at the conflict’s onset, has come under renewed pressure as earlier pre-war stockpiling has diminished and as a consequence of weak automotive output, hampering manufacturing output.”
Batstone Carr added that although the IMF has rewarded the UK economy with a mild upgrade at its mid-year reforecast, the Bank of England will likely view today’s data as a reason to keep interest rates unchanged through the summer.
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“Rate-setters will likely pay more attention to next week’s June CPI inflation data, and more latterly the impact of re-escalating conflict on energy prices, as the basis for their decision,” he said.
“Today’s data will, however, add to pressure on the incoming Burnham-led government to further clarify future economic policy initiatives.”
Kevin Brown, savings expert at financial mutual Scottish Friendly, said the economy was “demonstrating a degree of resilience that should be welcomed”.
However, he added that “renewed strikes in the Middle East have taken some of the shine off what would otherwise have been considered a fairly positive GDP reading”.
He said: “Growth on paper may mean little to many UK households while concerns about volatile energy prices, inflation and everyday bills continue to overshadow the wider picture.
“The real test is whether this momentum can be sustained long enough to improve living standards and give people greater confidence to spend, save and plan ahead.
“Today’s reading does little to change the outlook for interest rates, with the Bank of England likely to remain cautious about cutting its base rate while inflation risks remain elevated.”
George Lagarias, chief economist at Forvis Mazars, said: “The British economy is once again proving its resilience and pushing back on forecasts for a mid-year recession.
“While month-on-month economic growth for May was anaemic, just 0.1%, it still beat expectations for 0%. Meanwhile, the three-month GDP growth was 0.7% with the previous number revised up by 0.1%.
“For the second straight three-month period, all parts of the economy had a positive contribution, with services taking the lead.
“Having said that, today’s number doesn’t help Bank of England doves. With the resumption of hostilities in the Middle East, stronger than expected economic growth could tilt the scale towards a rate hike in the next few months.”
