(Bloomberg) -- The UK economy shrank less than expected in May as resilient consumer spending and a lull in the number of labor strikes offset the impact of an additional holiday to mark the coronation of King Charles III.
Gross domestic product fell 0.1% in May after an 0.2% gain the month before, the Office for National Statistics said Thursday. Economists had expected a drop of 0.3%. Manufacturing, services and construction all performed better than expected.
The figures continue a series of upward surprises for the UK, which avoided a recession that forecasters including the Bank of England and International Monetary Fund had expected to set in earlier this year. It will revive the focus on soaring inflation and the central bank’s efforts to cool the economy with sharp increases in borrowing costs.
“Overall consumption growth could remain sluggish until well into next year as households face multiple economic headwinds,” said Yael Selfin, chief economist at KPMG UK. “While stronger pay growth and falling inflation could see real incomes start growing again, the impact of higher mortgage costs and rising rents could weigh on household spending.”
Economists are reluctant to read too much into the month’s figures since May had an extra bank holiday for the king on top of the usual two. The figures also leave the UK with no growth over the last three months, with even optimists predicting sputtering gains and stagnation.
“Today’s GDP figure showing 0% growth in the three months to May provides further evidence of the precarious state of the UK economy,” said David Bharier, head of research at the British Chambers of Commerce. “Most firms are still not reporting improved business conditions.”
Analysts will keep a close eye on June’s data, noting a strong rebound might indicate underlying strength in activity, while a lackluster reading may hint a prolonged downturn has begun. It would take another drop of 0.1% in June to cause a contraction in output for the second quarter.
“June’s data will likely be flattered by a return to the usual number of working days,” said Ben Jones, lead economist at the CBI employers group. “Activity in the private sector has remained firm in recent months.”
Services that power the bulk of the economy produced no change in May, better than the 0.2% contraction economists had estimated but softer than the 0.3% growth in April.
Part of that was due to a lack of strike activity by doctors in the month, but figures for July will include the impact of a lengthy walkout. Arts, entertainment and recreation also saw strong growth. Wholesale and retail trade softened.
Accommodation and food services fell 0.9% after a strong April. Some pubs and bars benefited from the bank holiday, while others said it hurt performance. Rail strikes also held back footfall.
Manufacturing and construction both fell 0.2% in the month, which was less severe than the 0.5% drop expected for each category.
May marked the third consecutive monthly fall in construction, which was dragged down by house building. A jump in interest rates slowed the property market, and April’s reading for construction was cut sharply.
It was also the third month in a year that royal events have weighed on growth. Queen Elizabeth II’s funeral contributed and a public holiday to celebrate her Platinum Jubilee shaved 0.7% off output both in September and June last year.
Analysis suggests the impact of extra holidays is declining, and the blow from business closures over the May coronation holiday was offset by heavy spending on tourism and hospitality as Britons flocked to pubs toast their new monarch.
“While an extra Bank Holiday had an impact on growth in May, high inflation remains a drag anchor on economic growth,” Chancellor of the Exchequer Jeremy Hunt said after the report. “The best way to get growth going again and ease the pressure on families is to bring inflation down as quickly as possible.”
The Trades Union Congress lashed out at the Conservative government, saying the figures indicate the need for a plan to get the economy moving again.
“The UK is crying out for a credible economic plan to boost growth, jobs and pay,” said TUC General Secretary Paul Nowak. “But instead, we are stuck in a Tory doom loop. The government’s default answer to everything is to make working people poorer.”
Volatility in the monthly data — and occasional contractions — isn’t unusual even when the economy is strong. The ONS reported contractions in two of the six months from October 2022 and March 2023 even though numbers for the full quarter were positive. That bucked the forecasts the Bank of England made in November for one of the longest recessions on record.
“Perhaps perversely the Bank of England may take some comfort from this weaker output data, as it suggests demand may be cooling, which in turn reduces inflationary pressure,” said Kitty Ussher, chief economist at the Institute of Directors.
(Updates with details from the report.)
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