The UK economy’s unexpected growth in May could spell further delays in the Bank of England’s anticipated interest rate cuts, presenting a new hurdle for borrowers.
The Office for National Statistics (ONS) announced that the gross domestic product (GDP) increased by 0.4% in May, surpassing the predicted 0.2% growth. This upturn in economic performance followed a stagnant April, attributed to poor weather conditions dampening consumer spending.
The heightened economic activity has policymakers considering delaying interest rate reductions in their upcoming meeting in August. Suren Thiru, economics director at The Institute of Chartered Accountants, stated, “These figures confirm a robust rebound in economic activity as stronger services and construction output helped return the economy to growth.” However, he warned that June’s wet weather might have negated some of May’s gains.
Capital Economics’ UK economist, Ashley Webb, noted that the unexpected GDP rise means there is less urgency for the Bank of England to cut rates. He suggested that while an interest rate cut from 5.25% to 5.00% is still on the table for August, its timing remains heavily dependent on upcoming inflation and labour market data.
In April, the economy saw no growth after a 0.4% rise in March. The ONS highlighted that the services sector drove the increase, with significant contributions from information technology, and professional and scientific sectors. Between January and March, the UK’s GDP increased by 0.7%, showcasing a rebound from the recession in late 2023.
Liz McKeown, the ONS’s director of economic statistics, stated, “The economy grew strongly in May, with all the main sectors seeing increases.” She noted that both retailers and wholesalers experienced better sales, whilst construction saw its fastest growth in nearly a year due to increased housebuilding and infrastructure projects.
In contrast, inflation dropped to the Bank of England’s 2% target in June, the lowest in almost three years. Nevertheless, the long-term challenges remain. Despite the Conservative Party’s recent election victory, the chancellor, Rachel Reeves, pledged to revitalise the economy and achieve the highest sustained growth among G7 nations. Ms Reeves expressed her commitment to this mission, stating, “Delivering economic growth is our national mission, and we don’t have a minute to waste. A decade of national renewal has begun, and we are just getting started.”
The recent economic developments present a mixed bag for the UK. While the growth signals a recovering economy, it also means that borrowers might face continued high interest rates. The coming months will be crucial as new data sets the stage for the Bank of England’s policy decisions.