In May, the UK economy experienced faster growth than anticipated, with a notable boost from retailers and the construction industry. The economy expanded by 0.4%, a recovery from the stagnation observed in April due to adverse weather conditions that deterred shoppers and slowed construction projects. According to the Office for National Statistics (ONS), construction surged at its quickest rate in nearly a year, driven by house building and infrastructure initiatives.
Analysts indicated that these robust figures, coupled with recent statements from Bank of England officials, have made the decision on a potential interest rate cut next month highly uncertain. The growth rate for May was twice what analysts had forecasted. Liz McKeown from the ONS noted that retailers and wholesalers had a strong month, bouncing back from a weak performance in April. The services sector, encompassing businesses like shops, bars, and restaurants, grew by 0.3%, while the construction sector saw a 1.9% increase.
Economists caution against overemphasising monthly economic changes, which can be influenced by variables such as weather. Over the three months to May 2024, the economy grew by 0.9% compared to the previous quarter, marking the fastest growth rate in over two years, as reported by the ONS. The unexpectedly strong figures may lessen the likelihood of the Bank of England reducing interest rates from the current 16-year high of 5.25% at its meeting on 1 August. Interest rates were raised by the Bank to curb inflation, but recent data showed that inflation has returned to the Bank’s target of 2%.
Despite this, two members of the Bank’s Monetary Policy Committee (MPC) have expressed concerns about ongoing inflationary pressures. Economic growth can increase demand for goods and labour, potentially driving up prices and wages. Next week’s publication of inflation and wage rise figures will be crucial. Susannah Streeter, head of money and markets at Hargreaves Lansdown, remarked that the faster-than-expected economic growth might make Bank of England policymakers more hesitant to vote for an interest rate cut, suggesting that a summer rate cut is becoming less likely, with the 1 August vote expected to be very close.
Rob Wood, chief UK economist at Pantheon Macroeconomics, commented that the UK economy is recovering from last year’s minor recession. Although rate-setters seem keen to ease policy, as indicated by their June meeting minutes, this latest growth surprise supports the view that the MPC might wait until September to lower the Bank Rate.
Carrie-Anne Moore, who runs the alternative store Broken Bonds in Birmingham’s Digbeth indoor market, shared that her business is thriving. Over the past six months, her business has expanded significantly, growing from a small unit to a larger one and acquiring a second spot. She believes people now prefer in-person shopping experiences over online shopping, valuing the personal touch over faceless corporations.
Conversely, Mark Preston, who operates Ideal Skateboard in Digbeth, has faced challenges. He reported a tough spring season with poor sales due to bad weather, which kept people indoors and reduced the demand for skateboarding products.
The issue of economic growth was central in the recent general election. Responding to the latest figures, Chancellor Rachel Reeves emphasised that economic growth is the government’s “national mission,” highlighting recent actions taken to strengthen the economy. These include reintroducing housebuilding targets, overhauling planning restrictions, and lifting the ban on onshore wind farms in England. Additionally, a new National Wealth Fund has been established to attract investment in infrastructure and green industry. Shadow Chief Secretary to the Treasury, Laura Trott, noted that the recent figures demonstrate the economy’s strengthening due to measures implemented by the previous government, suggesting that Labour is inheriting an economy that is improving following difficult decisions made in the past.
The UK’s unexpected economic growth in May, driven by retail and construction sectors, has created uncertainty about future interest rate decisions. While some businesses are thriving, others face challenges, reflecting a mixed economic landscape. Government measures aim to sustain and enhance this growth amid ongoing economic adjustments.
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