The chancellor, Rachel Reeves, just days into the job, already knew the economy had jumped into growth back in May, according to official figures earlier this month.
GDP was up by 0.4 per cent in that month – boosted by a big bounce back in construction output, which had been depressed by prolonged wet weather earlier in the spring – according to the Office for National Statistics (ONS). This compared to the economy flatlining in April, as per data published shortly before the general election on 4 July.
Responding to the latest figures, Ms Reeves said: “A decade of national renewal has begun, and we are just getting started.” The 0.4 per cent growth was twice as good as expected by most firms in the financial district of London, known as the ‘City’. Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “The economy is well and truly putting last year’s minor recession behind it. But these growth numbers feel a bit too good to be true, so we assume some payback.”
The strong growth may delay the Bank of England’s (BoE) monetary policy committee (MPC) from cutting interest rates. Suren Thiru, economics director at accountants group ICAEW, said: “These GDP figures may make an August rate cut less likely.” The services sector remained a key driver for economic growth, the ONS said, with its fifth consecutive monthly increase.
Retailers had a particularly strong month, reporting a 2.9 per cent increase in trade for May. Accommodation and food services, which includes hotels and restaurants, was another strong performer, with 2.4 per cent growth. The construction industry saw output grow by 1.9 per cent, with an increase in both new work and maintenance.
The strong data means that City markets now see another hold in rates at the current level of 5.25 per cent as the slightly more likely outcome when the Bank of England’s Monetary Policy Committee meets this week. That is a turnaround from earlier this month when they had ranked the chances of a cut at 60/40.
The BoE chief economist Hugh Pill said underlying inflation pressure still showed “uncomfortable strength” despite the headline rate falling back to its 2 per cent target, and that it was still an “open question on whether the timing for a rate cut is now.”
City economists said the strong ONS numbers suggested September might now be the more likely date for a first cut of borrowing. Rob Morgan, chief investment analyst at investment management firm Charles Stanley, said: “Robust wage rises and sticky services prices have prevented the Bank (BoE) from acting earlier to cut rates, but with Consumer Price Index (CPI) inflation falling back on line with the 2 per cent target, a tentative first of 0.25 per cent reduction from the current 5.25 per cent is around the corner.
“However, this more robust growth picture may just tilt the balance away towards September rather than August for the first cut. We will then likely see a shallow trajectory of cuts, perhaps at a roughly quarterly pace, towards the 4 per cent level.”
Chief economist at investment bank Investec, Philip Shaw, said that “while one should not read too much into one month of GDP data, the economy has been performing more strongly than expected over the year so far. Our base case is still that the MPC will cut rates by 25 basis points on 1 August, but the case for an easing looks more finely balanced than it did previously.”
Meanwhile, economists also expect a long-term boost to growth from the new Labour government, with analysts from Goldman Sachs raising their growth forecasts for 2025 and 2026 by 0.1 percentage points. “We continue to expect that Labour’s fiscal policy agenda will provide a modest boost to demand growth in the near-term,” they wrote. (The writer is our foreign correspondent based in the UK)
Andy Jalil
The author is our foreign correspondent based in the UK
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