The Week: UK GDP: good news amid the gloom?

UK GDP data came in ahead of market expectations and staved off recession for another few months. Is it the sign of a turnaround?

  • UK GDP grew 0.5% in May, edging GDP into positive territory for the quarter
  • Growth was driven by doctors’ visits and a boom in travel
  • However, headwinds are gathering for the consumer sector

There was a glimmer of good news for the incoming Conservative leader this week when the UK economy squeaked higher after two months of contraction. Does it suggest that the economic impact of higher prices won’t be as profound as expected? Or is it too soon to get excited?

UK GDP grew 0.5% in May, ahead of expectations. This edges GDP into positive territory for the quarter and defers recession for another few months. The growth was fuelled by doctor visits, which helped partially to offset the end of test and trace operations and booster vaccine programmes. There was also a boom in travel, as people defied airport chaos to head abroad. 

There was also good news from the manufacturing sector, where operations have climbed in spite of price rises. This suggests supply chain problems may finally be drawing to a close and the sector is successfully passing on rising input costs. Construction also had a good month, as businesses sought to reshape their offices for the new working environment. 

However, before Penny or Rishi get their cheque books out in celebration, it is worth noting the headwinds. In the more recent S&P Global/CIPS UK Manufacturing PMI data, business optimism dropped to its lowest level since May 2020, while new orders contracted for the first time in 17 months. 

Danni Hewson, AJ Bell financial analyst, adds: “There are headwinds that are impossible to ignore.  Retailers, hospitality venues, gyms, museums and children’s play centres are all feeling the weight of high inflation. Households are strategically cutting back on their spending, which is a particular blow to the consumer services sector which still hasn’t been able to get anywhere near its pre-pandemic glory days.”

The UK economy has not yet felt the impact of rising rates, which will take time to filter through to mortgage payments. A recent survey from Charles Stanley showed that more than half of UK adults (55%) say they are not confident their finances will hold up against the cost of living increases. The recent heatwave has ensured that rising energy costs have not yet had a significant impact on household finances, but that is likely to change in the Autumn. 

Perhaps more worrying is the paucity of ideas from political leaders to re-energise the economy. A few tax cuts here or there is unlikely to reinvigorate growth. It is far too soon to believe the UK economy has turned a corner, or that action isn’t needed to turn it around.