UK economic growth stalls in April

A ‘better’ monthly GDP print for the UK this morning than expected, with growth in April coming in flat at 0.0% against expectations for a -0.1% fall. But this modest ‘beat’ masks the bigger picture of an economy that already appears to be losing momentum after bouncing back from recession last year and is now very much grappling with stagflation.

A key reason for the overall disappointing performance in April was the weather, with rainfall 155% of the long-term average and which acted to keep shoppers at home instead of on the high street and in shopping centres. This had already been flagged by the retail sales numbers and so in that respect was not a surprise. The biggest boost came from the services sector, although not in consumer-facing services, suggesting that high prices are acting to curtail spending here too. And of course, the combination of high interest rates and unaffordable prices is continuing to grind activity down, even if this is seen by the Bank of England (BoE) as the medicine needed to get CPI back to target.

Going forward, however, the picture potentially looks a little brighter. Despite the economic recovery stalling in April, the dual drags on growth from high interest rates and high inflation should increasingly fade as the year progresses, boosting consumer confidence and supporting spending, and in turn providing a much-needed tailwind to activity. However, how much of a boost this will ultimately deliver remains key. Despite today’s soft numbers, a first interest rate cut from the BoE is not expected until at least August – probably later – while even if inflation slows, real spending power remains significantly lower than pre-pandemic and it will take some time before income growth can make up the lost ground. Indeed, most forecasts suggest that the economy may grow by only around 0.6% for 2024 as a whole.

On the other side of the coin, and suggesting a rosier outlook, is survey data, with the latest composite PMI reading suggesting growth of around 0.25% this quarter, and with most firms’ optimism on the growth outlook now well above the levels seen last year. The picture painted here is one of the UK economy continuing to grow over the course of the year and that April’s reading will turn out to be a weather-related blip only. Unfortunately, such a scenario could end up complicating upcoming interest rate decisions from the BoE, given that stronger GDP growth can be expected to boost labour demand too and potentially exacerbating the already strong wages growth numbers being seen. Such a scenario could easily see a first interest cut delayed until a clearer picture emerges of just how well the economy is faring, or not.

But for now the BoE will be hoping that the slower growth numbers reported today will translate into slower demand, in turn helping to rein in inflation and allowing it to reduce borrowing costs later this year; market pricing is still suggesting, however, that this first cut will not be seen until Q4.