The UK emerged powerfully from a mild recession, providing a measure of respite for Prime Minister Rishi Sunak, who has so far grappled with achieving his goal of economic growth. The gross domestic product surged by 0.6 per cent in the first quarter relative to the prior quarter, as stated by the Office for National Statistics on Friday. This was the most favourable reading since late 2021 when the UK eased lockdown protocols, surpassing the 0.4 per cent growth prediction by industry experts.
Customers flocked back to retailers, and the absence of industrial action promoted the transport sector in the first quarter. Business investments were also significantly stronger than anticipated. The March alone saw a growth of 0.4 per cent, largely exceeding projections owing to a resurgence in both services and manufacturing sectors.
“UK’s economy has overcome the worst”, commented Yael Selfin, KPMG UK’s chief economist. “Future indicators suggest continued progress in the ensuing months, aligning with our outlook.”
Sterling increased slightly after the data, but the surge was shortly checked. The currency was up by less than 0.1 per cent to $1.2533.
These statistics signify a definitive conclusion to the gentlest recession in approximately 70 years – a reduction of 0.4 per cent from peak to trough in the latter part of the previous year. This may create difficulties for the Bank of England as it decides when to decrease interest rates, with robust growth potentially stimulating inflationary pressures that officials are yet to ascertain as being under control.
“Everything seems to hint that things are finally starting to recover since the start of this year,” Liz Martins, senior economist at HSBC, stated on Bloomberg Radio. “The concern arises if those interest rate cuts are not implemented, then the foundation of this recovery could be weakened, possibly diminishing some of the momentum.”
A boost in economic activity provides the governing Conservative Party with welcomed good news amidst a tough few weeks. The party endured significant losses in local elections, including a flagship mayoral position in the West Midlands, and has had two of its Members of Parliament defect to the opposition Labour party.
In response to the recent data, Jeremy Hunt, the Chancellor of the Exchequer, said the figures serve as “proof that the economy is making a full recovery.”
In an interview on Sky News, Hunt emphasised that the challenging choices made by families over the past few years are now beginning to bear fruit, which is further evidence that it is crucial to continue on this path. Despite prioritising economic growth upon taking office in Number 10, Sunak has grappled with a severe living cost crisis and excessive interest rates, leading to a floundering economy.
In an attempt to placate members of Parliament, who are displeased with the Conservatives’ poor polling ahead of a national election, both Sunak and Hunt have asserted that the economy started to recover in early 2024. The Conservatives trail behind Labour by over 20 points, but Sunak points to reduced inflation, more manageable energy bills, and wage growth as indications of an economic revival.
Ben Jones, CBI’s lead economist, predicted a potential reduction in future interest rates due to a decline in inflation, and consequently, the economy should be able to maintain momentum throughout the year. Several indicators support this, such as a 0.4% increase in output per head in the first quarter, breaking a sequence of seven consecutive quarters with no growth. Still, GDP per head is suspected to be 0.7% less than in the same period the previous year.
The recent economic recovery was primarily fueled by a 0.7% rise in service output in the first quarter, concluding three continuous quarters of decline for the UK’s biggest sector. The easing of the cost of living crisis has ameliorated households’ purchasing power. Nevertheless, there was a mixed response outside of services. Industrial production observed a 0.8% increase while construction output dropped by 0.9%.
However, Rachel Reeves, Labour’s future chancellor, warns that it is premature for Conservative ministers to celebrate. She stated, “The economy is still £300 smaller per person than when Rishi Sunak assumed the role of prime minister.”
Despite chaos in the Middle East and Red Sea, the ONS noted that the UK’s imports remained stable. Excluding precious metals, the UK’s trade deficit shrunk to £7.8 billion in the first quarter and has been on a downward trend since 2022 started.
Thomas Pugh, an economist at RSM UK, voiced optimism about the future strength and prosperity of the UK economy, foreseeing a more prosperous phase than the previous four-year period. He predicted that households’ disposable income would see a substantial rise in the latter half of this year driven by factors such as higher real earnings, tax reductions, and declining interest rates. Moreover, he stated that the anticipated rebound in consumer sentiment would lead to this surge in income being circulated back into the economy. – Bloomberg