The latest gross domestic product statistics show that the UK economy unexpectedly grew in May although forward-looking indicators still point to a deteriorating outlook.
Figures released last month by the Office for National Statistics (ONS) revealed that the economy returned to growth in May after contracting during April. In total, UK economic output rose by 0.5% across the month, significantly exceeding the consensus forecast from a Reuters poll of economists which had predicted zero growth.
ONS said the main sectors of the economy all expanded during May including construction, travel and manufacturing. The data also revealed significant growth within health services as one of the key drivers of growth during the month.
In spite of May’s rebound, analysts still expect the economy to come under increasing pressure in the coming months as the cost-of-living squeeze weighs heavily on households’ ability to spend. Recent survey evidence also points to weaker growth, with July’s preliminary headline reading of S&P Global’s Purchasing Managers’ Index recording the weakest rise in UK private sector business activity for 17 months.
Commenting on the findings, S&P Global Market Intelligence’s Chief Business Economist Chris Williamson said, “Economic growth slowed to a crawl in July, registering the slowest expansion since the lockdowns of early-2021.” And he added, “Forward-looking indicators suggest worse is to come.”
The latest economic forecasts from the International Monetary Fund suggest the global economy is also facing ‘an increasingly gloomy and uncertain outlook’. The international soothsayer now predicts global growth will slow from 6.1% last year to 3.2% in 2022 and 2.9% in 2023, downgrades of 0.4 and 0.7 percentage points from April’s projections. The UK is expected to be
particularly hard hit, with growth next year forecast to be just 0.5%, the weakest among the G7 nations.
Inflation at 40-year high
Official statistics show consumer prices are rising at their fastest rate in four decades fuelling expectations of another base rate hike when the Bank of England (BoE) concludes its next monetary policy meeting in early August.
ONS data released last month revealed that the UK’s headline rate of inflation rose to 9.4% in June, the highest recorded level since February 1982. This was up from the previous month’s rate of 9.1% and slightly higher than analysts’ expectations.
Motor fuels and food were the biggest upward contributors to June’s figure. ONS said average petrol prices rose by 18.1p per litre, the largest monthly increase since records began in 1990, while the cost of milk, cheese and eggs all climbed sharply and the price of vegetables, meat and ready meals also rose notably.
The jump in inflation increased the chances of a sixth successive rate hike when the BoE’s Monetary Policy Committee (MPC) next convenes. The MPC is due to announce its decision on 4 August, with speculation of a half percentage-point rise intensifying following recent comments by the Bank’s Governor Andrew Bailey.
During a Mansion House speech the day before June’s inflation data was released, Mr Bailey reiterated that the MPC is ready to “act forcefully” if it sees signs of greater inflation persistence. “In simple terms, this means that a 50 basis point increase will be among the choices on the table when we next meet,” Mr Bailey said.
However, the Governor also made it clear that such a rise was “not locked in”. And a Reuters poll published towards the end of July suggests the MPC’s decision will be an extremely close call, with just over half of the economists surveyed predicting a 25 basis point rise and the remainder all saying they expect a 50 basis point hike.