The Labour Party’s landslide election victory has somewhat coincided with the UK economy showing signs of progressing in the right direction. The inflation figures for May released just over a fortnight ago gave experts pause for thought as they considered the UK’s growth prospects for the year to follow. The earlier figures showed surprisingly strong growth in the first quarter of this year beating every other G7 economy.
However, recent figures have been a little less positive. For example, April’s GDP figures, showed that the economy was stagnant-raising questions about the strength of the UK’s economic recovery. June’s data, however, provided some clues as to what is really happening. The Office for National Statistics (ONS) released its retail sales figures for May, which were very encouraging.
The data showed that sales volumes jumped 2.9pc in May, well ahead of expectations and more than offsetting the surprisingly large fall in April. This big fall was largely driven by the wet weather, according to the ONS, and so May’s better weather was given some credit. But analysts were quick to point to improving consumer sentiment as households continue to recover from the cost-of-living crisis.
Senior UK economist at Capital Economics, Andrew Wishart, noted: “The strength was broad-based across the retail sector including online suggesting an underlying strengthening in sales beyond weather effects.” Reinforcing the retail strength, GfK’s (Growth from Knowledge) consumer confidence figures showed that consumer confidence rose to its highest level since November 2021 in May, albeit still strongly in negative territory. Coming just a few days after inflation touched two per cent and the Bank of England suggested that an August rate cut was looking likely, many economists found a good case for optimism.
Just then there was S&P’s latest purchasing manager’s index (PMI) conducted in June which measures activity in the private sector and is generally seen as a good indicator of growth. The PMI showed that output had dropped to the lowest level since November. It fell to 51.7 in June, down from 53.0 in May and well below expectations. The slowdown was driven by slower performance in the UK’s all-important service sectors, which include the retail sector.
On one level there’s a question of timing. June’s PMI comes, of course, later than May’s retail sales, so probably both could be true. But it would seem odd for one measure to point to a strong recovery which is then almost entirely wiped out the very next month.
Chief UK economist at Pantheon Macroeconomists, Rob Wood, said the strength in retail sales made him “sceptical” that growth had “suddenly slowed”. More likely is that June’s PMI was impacted by the election. Indeed, the survey showed that political uncertainty was contributing to the slowdown.
Chief business economist at S&P Global Market Intelligence, Chris Williamson, said many firms were seeing a “hiatus” in decision-making as they await clarity on various aspects of economic policy. The survey suggested that new business orders remained fairly consistent in June, suggesting that growth could return in the months ahead.
“The PMI fall is an election-related blip,” Pantheon’s Wood said. “The UK is growing fine”. If you take the average of the last three PMI’s, then the UK is on track to grow about 0.2pc in the second quarter, which is not particularly impressive.
The retail sales figures have also been extremely volatile in recent months, with a large fall in sales volumes swiftly followed by a slightly larger recovery. The underlying trend is positive but it is slow progress. Looking through the volatility of monthly figures shows an economy that needs reform to get it to storm ahead. (The writer is our foreign correspondent based in the UK)
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