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UK Economy Expands 0.4% in May, Double the Expected Pace

A housing development in Goffs Oak, UK. Photographer: Chris Ratcliffe/Bloomberg (Chris Ratcliffe/Bloomberg)

(Bloomberg) -- The UK economy expanded at twice the pace expected in May, a sign of the strength that the new Labour government is counting on to fund its ambitious plans to get the nation working again.

Gross domestic product rose 0.4% month-on-month in May after the flat reading in April, the Office for National Statistics said on Thursday. That compares with the 0.2% pace economists had expected, reflecting the fastest expansion in construction in almost a year.

The figures put Britain on course for another solid quarter of expansion, continuing a recovery from recession that Labour wants to turbocharge with a blitz of growth-boosting policies. It also may make the Bank of England more hesitant to start an interest rate cutting cycle, with some policy makers warning that inflation is expected to rise again.

“The print will be good news for Prime Minister Keir Starmer, but less so for the Bank of England,” said Ana Andrade at Bloomberg Economics. 

Labour is counting on a growth spurt to help fund plans to revive crumbling frontline services, with swathes of the public sector strained by the pandemic and years of real-terms spending cuts.

The pound slightly rose after the data, up 0.1% to $1.2865, the highest in four months. The currency gained 1.7% so far this month, outperforming all Group-of-10 peers, on hopes of political stability after Labour’s election victory in and expectations the UK’s interest-rate gap with the US will remain unchanged.

Markets currently see a chance of just under 50% for a move downwards at the BOE’s next meeting on Aug. 1. Investors backed away from bets on a move next month after hawkish comments this week from BOE Chief Economist Huw Pill and policy makers Catherine Mann and Jonathan Haskel.

“This latest upside growth surprise supports our call that the MPC will wait until September to reduce Bank Rate,” said Robert Wood, chief UK economist at Pantheon Macroeconomics. “Strong growth also signals that rate-setters will cut interest rates only cautiously, by which we mean once a quarter at most.”

The economy is looking more robust than the BOE had expected. Output rose 0.9% in the three months to May compared to the previous three months, the quickest pace in more than two years.

Better weather in May helped revive activity in the retail and construction sectors, which were held back by heavy rain in April. Previous data showed retail sales jumped as the UK enjoyed the warmest May on record, according to the Met Office.

Services output grew by 1.1% in the three months to May, the fastest pace since December 2021. Professional, scientific and technical activities and administrative and support made the largest contributions, while the sector saw growth across the board.

Manufacturing rose 0.4% in the month, reversing part of the 1.4% drop in April.

“The economy has performed relatively well since the start of the year,” said Yael  Selfin, chief economist at KPMG UK. “Consumer spending is set to be the main driver of activity in the second half of the year.”

New Chancellor of the Exchequer Rachel Reeves has vowed to make a sustained pick-up in growth a “national mission,” as Labour seeks to generate more money to fund creaking public services. It’s rushing through policies, such as reforms to the onerous planning system, to revive the economy after a misfiring performance under the Conservatives in recent years.

While the figures were from when the former Prime Minister Rishi Sunak’s Conservative government was in power, Reeves still declared that a “decade of national renewal has begun,” saying that “we are just getting started.” 

Starmer has pledged to deliver the fastest growth in the Group of Seven nations, a difficult goal given the UK’s sluggish performance since its exit from the European Union.

“It’s reassuring and a step in the right direction to know that delivering economic growth is at the heart of the new government’s agenda – a challenge which requires sustained effort, long-term strategy and stable policies in place,” said Hailey Low, an economist at the National Institute of Economic and Social Research.

The reading is likely to spur more hand-wringing within the Tory party that Sunak should have stuck to his original plan to call an election later in the year when there were more signs of growth in the economy instead of going to the polls on July 4, which delivered a landslide victory for Labour.

After slipping into a shallow recession last year, the UK economy’s prospects have improved in 2024 as wages grow in real terms again following the cost-of-living crisis.

Growth will beat the BOE’s second quarter estimate of 0.5% if the economy avoids a decline in June. According to the ONS, growth will match the first quarter expansion of 0.7% if the expansion in June is between 0.01% and 0.31%.

While output was unchanged in a weather-affected April, the numbers for the second quarter will be boosted by GDP starting the period at a higher level following the strong end to the first quarter. June’s figures may also be lifted by consumer spending being driven by the Euros football tournament and Taylor Swift’s blockbuster Eras Tour arriving in the UK.

“The warmest May on record helped stoke a stronger-than-expected recovery in GDP growth, driving activity in consumer-facing sectors like retail as well as supporting construction activity,” said Anna Leach, chief economist at the Institute of Directors.

--With assistance from Aline Oyamada.

(Updates with comment and market reaction from the third paragraph.)

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