Economic Review of May 2024
UK Growth Rate at Two-Year High
The first-quarter gross domestic product (GDP) statistics released last month confirmed that the UK economy has exited the shallow recession it entered during the latter half of last year. Survey evidence suggests private sector output has continued to expand over the past two months.
The latest GDP data from the Office for National Statistics (ONS) showed the UK economy grew by 0.6% during the January to March period. This figure was above all forecasts submitted to a Reuters poll of economists, with a consensus prediction of 0.4% growth. This represents the fastest quarterly growth rate since the last quarter of 2021.
ONS noted that growth was driven by broad-based strength across the services sector, with retail, public transport and haulage, and health performing well. Car manufacturers also enjoyed a good quarter, although construction activity remained weak. Additionally, the first-quarter data likely received a boost from Easter falling in March this year compared to April last year.
Data from the S&P Global/CIPS UK Purchasing Managers’ Index (PMI) suggests the recovery has continued into the second quarter. While May’s monthly release showed the preliminary composite headline Index fell to 52.8 from 54.1 in April, this latest reading was still above the 50 threshold, indicating growth in private sector activity.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented, “The flash PMI survey data for May signaled further expansion of UK business activity, suggesting the economy continues to recover from the mild recession seen late last year. The survey data are consistent with GDP rising by around 0.3% in the second quarter, with an encouraging revival of manufacturing accompanied by sustained, but slower, service sector growth.”
Inflation Data Dampens Rate Cut Hopes
The likelihood of the Bank of England (BoE) sanctioning a June interest rate cut has significantly declined following last month’s smaller-than-expected drop in inflation.
After its latest meeting on May 8, the BoE’s Monetary Policy Committee (MPC) voted by a seven to two majority to leave the Bank Rate unchanged at 5.25%. The two dissenting voices preferred a quarter-point reduction. Comments made by policymakers suggested a rate cut was edging closer, with BoE Governor Andrew Bailey emphasizing the need for “more evidence” of slowing price rises before cutting rates.
BoE Deputy Governor Ben Broadbent also indicated that, if forecasts align, a rate cut could be “possible” over the summer. However, last month’s inflation data appears to have dashed hopes for an imminent cut. Although the annual CPI rate fell sharply from 3.2% in March to 2.3% in May, this decline was less than expected, with both the BoE and economists predicting a drop to 2.1%.
The next two MPC announcements are scheduled for June 20 and August 1. While an August rate cut is still a possibility, most analysts agree that a June reduction is unlikely.
Consumer Sentiment Continues to Rise
Despite official retail sales statistics for May revealing a larger than expected decline in sales volumes, recent survey data indicates an improving consumer outlook as households become more optimistic about their finances.
ONS data showed total retail sales volumes fell by 2.3% in May, following a 0.2% decline in March. Poor weather reduced footfall, but ONS stated that seasonally adjusted figures accounted for the Easter holidays timing.
Survey data from the CBI Distributive Trades Survey reported a balance of +8 in its year-on-year sales volumes measure after May’s slump to -44. The CBI attributed May’s rise to an improvement in activity and suggested that falling inflation and real wage growth will contribute to a healthier consumer outlook.
The latest GfK consumer confidence index also revealed another rise in consumer sentiment, with May’s headline figure reaching its highest level in nearly two-and-a-half years, as households took a positive view of their personal finances.
Wage Growth Remains Resilient
Earnings statistics published last month showed strong wage growth despite a slowing jobs market. Analysts, however, expect pay growth to moderate over the coming months.
ONS figures revealed that average weekly earnings excluding bonuses rose at an annual rate of 6.0% in the first three months of 2024, the same rate as the previous three-month period, defying expectations of a slight dip to 5.9%. After adjusting for CPI inflation, regular pay increased by 2.4% on the year, marking the largest rise in real earnings in over two years.
A survey by the Recruitment and Employment Confederation suggested earnings growth remained high in April, with pay rates for temporary staff rising at their fastest rate in nearly a year, partly due to May’s 9.8% minimum wage rise.
Research from the Chartered Institute of Personnel and Development (CIPD) found employer expectations for private sector wage rises remain unchanged from three months ago. However, CIPD expects employers to adjust pay plans as inflation falls and the labour market continues to slow.
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**Important Notice**: This review is for informational purposes only and should not be used for individual investment decisions. Always seek professional advice tailored to your personal finances. The information is based on current understanding and is subject to change without notice. The accuracy and completeness of the information cannot be guaranteed. Some rules may vary in different parts of the UK. All details are correct as of June 3, 2024.
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