A view from London
The UK recovery fits with a wider, international picture.
Ian Stewart
The UK economy returned to growth in the first three months of the year, having slipped into a technical recession in the second half of 2023. GDP growth of 0.6% on the previous quarter represents the strongest expansion for two years, and the joint fastest in the G7 alongside Canada.
While we shouldn’t place too much weight on one data release – GDP numbers are choppy and often heavily revised – first quarter growth was remarkably strong and the rebound was broad-based. This looks like a plausible recovery.
Services output increased for the first time since Q1 2023, with 11 out of 14 subsectors increasing, suggesting consumer activity was picking up as inflation fell. Manufacturing, which has been a weak spot, also expanded, driven by car production. These gains were only offset a little by a contraction in the construction sector. GDP per head also rose, up 0.4%, after seven consecutive quarters without growth. High frequency Purchasing Manging Indices suggest this strong momentum continued in April. Rising activity in the housing market and higher levels of consumer and business confidence are consistent with a continued economic recovery.
First quarter growth was strong, but this comes after a sustained period of weakness. The stagnation of the past few years means the total level of output in the UK is just 1.7% higher than it was on the eve of the pandemic, well below the 3.8% and 8.7% growth seen in the euro area and US respectively over the same period.
The UK recovery fits with a wider, international picture. The euro area returned to growth in the first quarter after a weak 2023, while inflationary pressures continued to ease. The US economy, which has bucked the trend of other western economies by growing strongly in 2023 continues to show good growth. Stronger activity overseas should help boost UK exports. The Bank of England has raised its forecast for UK exports this year from a contraction of 0.25% in February to an increase of 2.0% in its latest forecasts.
The path of UK growth is heavily dependent on what happens to inflation and last week brought good news on this front too. Following last Thursday’s rate setting meeting the Bank of England’s Monetary Policy Committee said it now expected underlying inflationary pressures to fade “slightly faster” than previously assumed and consequently: “It is likely that we will need to cut bank rates over the coming quarters . . . possibly more so than currently priced into market rates”. The Bank’s new forecasts predict both faster growth and lower inflation than previously expected. For businesses and consumers that is a dream combination. With inflation forecast to continue falling, financial markets expect the Bank to cut UK interest rates by around 50bps, to 4.75%, by December.
The UK economy is on the mend. Barring external shocks, we expect growth to continue through the rest of this year and next year at around trend, or normal, levels. Falling inflation, rising real incomes and growth in the US and Europe should help to maintain the recovery.