UK economy continues to motor ahead

A better set of growth numbers from the UK this morning, showing output growing by 0.4% in May and bringing the 3-mth-on-3mth growth rate to a healthy 0.9%. It is the joint-fastest pace of expansion since June last year and will be welcome news for the new Labour government which has boosting growth at the heart of its economic strategy.

The recession of last year is fading faster than had been expected. Growth so far in 2024 has risen by 1.5% and the 0.9% 3mth-on-3mth growth rate is the fastest pace of growth seen since the start of 2022. And encouragingly, the Office for National Statistics is reporting that this rebound in activity is broad based, with only the construction sector failing to make a notable contribution, largely on account of the generally wetter weather that has been seen over significant periods of H1. The reversal in energy costs has been one of the key factors behind this better performance, reducing both business and household costs, and by helping to return CPI back to its 2% target, has providing a boost to household incomes as real wages are finally growing in real terms.

The biggest contribution to the strong May figure was the 2.9% recovery seen in retail sales, which bounced back after the rain-soaked April kept shoppers away from high streets and shopping centres, and which raised wholesale and retail output by 1.8% over the month, a significant reversal from the -1.3% reading seen in April. Consumer-facing services also posted a strong performance, rising by 0.8%, and continuing the robust growth that has been seen so far this year. Manufacturing output also rose, by 0.4%. But construction output exploded, up by 1.9% as the drier weather finally allowed building companies to get going again.

However, despite today’s good news, potential headwinds may yet emerge going forward. This week’s retail sales report from the British Retail Consortium showed consumer spending to be once again spluttering, with annual growth in sales to June falling by -0.2%, down from May’s +0.7% print, as cooler and wetter weather once again deterred shoppers from venturing out - the boost to growth from spending in May may not be there in June. And survey data is also suggesting the pace of growth is expected to slow over H2.

But the biggest potential downside from today’s numbers is that the stronger pace of growth may be sufficient to persuade the Bank of England (BoE) to delay cutting interest rates, moving a first cut - widely expected in August - back one month to September. The numbers certainly suggest the economy is pushing back against the dampening effect of higher interest rates and this concern may be enough to see a majority on the Monetary Policy Committee (MPC) vote to keep rates unchanged next month. Although the June meeting suggested the BoE is keen to cut rates, MPC members Pill, Haskel and Mann have all warned this week about the persistence of ongoing pricing pressures that are still being seen, and today’s figures will do nothing to assuage those concerns. The potential for stronger growth also signals that the pace of reductions thereafter will potentially be more measured.

On balance, therefore, today’s figures probably tilt the scales a little bit further in favour a first cut now being delivered in September, which should prove to be positive for sterling.