UK economy back on growth path

The UK economy experienced a modest return to growth in April, buoyed by increased car sales and consumer spending in pubs and bars. The Office for National Statistics reported a 0.2% month-on-month rise in gross domestic product (GDP), in line with the expectations of economists. This growth follows a 0.3% decline in March due to public sector strikes. While the dominant services sector saw a boost in consumer spending, the health sector output was affected by junior doctors’ strikes, and activity dipped in computer manufacturing and pharmaceuticals.

However, the ONS highlighted signs of strain, particularly in the construction sector, which witnessed a sharp monthly fall in activity. Rising interest rates and declining property values put pressure on housebuilders and estate agents, leading to a challenging month for them. Despite the return to growth in April, the Bank of England is expected to raise interest rates for the 13th consecutive time in response to persistent inflation. Economists suggest that policymakers might view this growth as an indication that higher interest rates have not sufficiently curbed demand to alleviate inflationary pressure.

While the April figures showed a stronger-than-expected jobs market and record wage growth, concerns remain about households feeling worse off, the rising mortgage penalty, and the country’s global competitiveness. GDP grew by 0.1% over the three months to April, lifting the UK economy slightly above pre-pandemic levels. However, analysts caution that the recent resurgence may be short-lived due to the impact of higher interest rates on mortgage holders’ spending power. Capital Economics estimates that more than 60% of the economic drag caused by increased borrowing costs is yet to be felt, leading to predictions of a potential recession in the second half of the year.

Although the UK economy has defied previous recession fears, recent factors such as falling global energy prices and improved consumer confidence have helped support activity. Revised data also revealed that the eurozone entered a mild recession in early 2023, while the US economy experienced moderate growth in the first quarter. The Chancellor, Jeremy Hunt, cited the International Monetary Fund’s forecast that the UK would outpace Germany, France, and Italy in terms of economic growth from 2025. However, business leaders expressed concerns over the marginal growth rate, emphasising the challenges faced by exporters due to trade barriers and upcoming changes in EU trade regulations.

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