UK economy grows in May, boost for new government

BRITAIN'S economy grew more quickly than expected in May, providing some momentum for the new government of prime minister Keir Starmer but adding to doubts about whether the Bank of England will cut interest rates next month.

Economic output increased by 0.4 per cent in May, after a 0.2 per cent rise in April, the Office for National Statistics said. A Reuters poll of economists had pointed to another 0.2 per cent monthly increase.

The strength of the upturn could dissuade the BoE from beginning to cut interest rates as soon as August 1, its next scheduled monetary policy announcement date. Three policymakers this week emphasised the strength of domestic price pressures.

The chance of a rate cut in three weeks fell below 50 per cent on the futures markets from just above 50 per cent on Wednesday.

May saw a broad-based increase in economic output, with the services, manufacturing and construction industries all growing and the latter up by 1.9 per cent on the month, driven by house-building.

The figures represented an early boost for the new Labour administration, which has set itself the aim of achieving the fastest growth among the Group of Seven advanced economies on a sustained basis.

"Delivering economic growth is our national mission, and we don't have a minute to waste," Britain's new finance minister Rachel Reeves said in response to Thursday's data.

"A decade of national renewal has begun, and we are just getting started," added Reeves, who became the country's first female chancellor of the exchequer.

"The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate," Ashley Webb, an economist with consultancy Capital Economics, said.

Britain's economy appears to have snapped out of its low-growth rut, at least for now. Output has grown by 1.5 per cent since the turn of the year, marking its best five months since early 2017, excluding the rebound from the COVID-19 pandemic.

Goldman Sachs on Thursday nudged up its growth forecast for 2024 to 1.2 per cent from 1.1 per cent.

Still, the longer-run picture remains weak, with the economy only 2.7 per cent larger than its pre-pandemic level of late 2019.

According to the latest quarterly data, only Germany has fared worse since the pandemic.

Over the three months to May, the economy expanded by 0.9 per cent, the strongest reading since the three months to January 2022, compared with the consensus forecast for a 0.7 per cent expansion.

The BoE said last month it expected the economy would grow by 0.5 per cent over the second quarter - something that now looks likely to prove too low.

"These GDP figures may make an August rate cut less likely by providing those rate setters who are concerned about underlying price pressures with sufficient confidence about the UK's economic recovery to continue putting off loosening policy," Suren Thiru, economics director at accountancy body ICAEW, said.

Separate ONS data showed Britain's overall trade deficit, excluding precious metals, narrowed to £3.2 billion in May from £4.7 billion in April.

But goods exports to the European Union fell to their lowest since January 2022, when Brexit customs checks were introduced, and consistent with levels seen during the late 1990s.

Starmer has said he wants to reduce trade frictions with the EU but he will not agree to joining the bloc's single market. (Agencies)