UK economy shows faster pace of expansion in Q1

Better final Q1 GDP figures from the UK this morning which show the economy to be bouncing back more strongly from last year’s recession than expected. The upwardly revised output figure for Q1 now stands at 0.7%, a sharp improvement from the -0.3% reading recorded for Q4, and which leaves annual growth to Q1 at 0.3%, up from -0.2% last quarter. The economy has now recovered all the ground lost in last year’s recession in just one quarter and, from the perspective of monetary policy, probably makes a first interest rate cut being delayed until September a little bit more likely.

The final numbers show that the pick-up in Q1 growth was broad-based. Household spending rose by 0.4%, while overall investment contributed 0.2%. Within this figure, business investment rose by 0.5% and housing investment by 3.2%, while government investment rose by 2.8%. These are welcome numbers and suggest modest capital investment growth over the year as a whole of around 1.5%. And with the financial position of firms at the aggregate level displaying largely healthy balance sheets, it suggests that if consumer demand picks up over the course of 2024 as expected, so investment overall should strengthen further also.

However, the potential piece of bad news in the numbers - on the surface at least - is the reported increase in the savings ratio, which rose to 11% from 10.2% in Q4, potentially sucking demand out of the economy. But importantly, most of this increase was accounted for by increased contributions made to pension schemes, a volatile component that normally has no bearing on household attitudes towards immediate consumption. And the suggestion that consumers are proving more willing to spend money is given added weight by the fact that, despite nominal household disposable incomes growing by 0.7% q/q on the back of the further cuts made to national insurance contributions and strong wages growth, the cash savings rate rose by significantly less, increasing from 8.1% in Q4 to only 8.4% in Q1.

Going forward, the numbers suggest that the UK economy is in better shape than previously thought and that overall growth in 2024 may yet turn out to be stronger than expected. However, the Bank of England (BoE) is expecting growth to slow over H2 to just 0.2% per quarter, a much more tepid pace of activity, and a forecast that was accompanied by the Monetary Policy Committee (MPC) signaling at this month's meeting that the bar to cutting interest rates is now quite low. The key to how things eventually pan out will likely rest on the shoulders of consumers, specifically their willingness to increase spending as real incomes grow. In this regard, the expectation of an interest rate cut being delivered at the August or September MPC meeting is an obvious positive, but the near inevitability of taxes rising sharply in the next Parliament presents a considerable headwind.

On balance, and despite today’s better numbers, our forecast remains that UK activity will slow over the remainder of the year and that the pace of economic growth over the medium term will remain below trend.