Stronger-than-expected economy growth offers no long-term relief to Starmer

Britain's new government has inherited an economy that is gaining momentum. However, the recent stronger-than-expected growth figures do not indicate that prime minister Keir Starmer and his team have resolved their issues with public spending.

Over the three months to May, economic growth was the strongest in more than two years, according to the Office for National Statistics.

In May alone, the economy grew by 0.4 per cent, double the forecast in a Reuters poll of economists, suggesting last year's shallow recession is now in the past.

"The question two months ago was whether growth would reach 1.0 per cent this year. It is now possibly whether it will hit 1.5 per cent," Philip Shaw, an economist with Investec, said.

Since the Covid-19 pandemic, Britain's economy has been the second-weakest among the Group of Seven nations after Germany, which has impacted incomes that have struggled to gain since the 2007-2009 financial crisis.

Slow growth limits the new government's ability to quickly address the country's strained health system and other public services, given Starmer's promise not to raise the main forms of taxation.

Starmer says he will restore Britain to its 2.5 per cent growth pace of the early 2000s with a mix of reforms to the planning system, support for strategic sectors, and political stability to attract investors.

But this process will take years, leaving the government reliant on the short-term economic outlook.

The immediate outlook appears to be improving.

Short-term upgrade, long-term problems

The official forecasts that support the tax and spending plans of the last Conservative government predicted economic growth of 0.8 per cent in 2024.

Considered optimistic in March, this projection might be too conservative based on the latest growth data.

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

James Smith, an economist with ING, said the economy would probably slow in the second half of 2024, but growth seemed likely to remain reasonable.

Furthermore, the BoE is expected to start cutting interest rates in the coming months, easing the pressure on households after inflation returns to normal levels.

However, much of the recent recovery may be a short-term rebound in spending power due to the fall in energy prices after Russia's invasion of Ukraine.

The government's hopes for more budget room to invest in Britain's health service and other public sector issues depend on the longer-term forecasts of the country's budget watchdog.

The Office for Budget Responsibility will publish its next growth prospects assessment when new finance minister Rachel Reeves delivers her first budget statement, likely in October or November.

Those forecasts may be lower than the March projections, as the economy faces challenges such as persistent inflation pressures, a lack of workers, and a more protectionist global economy.

"Yes, the economy is looking better now," Smith, the ING economist, said. "But the OBR growth forecasts are more likely to see downwards revisions than upward revisions. Essentially, that means less headroom."

(Reuters)