UK economy 'rebounds' to unexpected growth

The UK economy defied expectations in May and "rebounded" to record a healthy 0.5 per cent increase in GDP, according to official figures published on Wednesday.

David Sapsted

13 July 2022

Economists had widely forecast that, at best, GDP would flatline in May after shrinking in the two previous months, but the Office for National Statistics (ONS) said growth in construction industry had spearheaded the widely welcomed recovery.Kitty Ussher, Chief Economist at the Institute of Directors (IoD), described the unexpected growth as "reassuring news" for business leaders concerned about the state of the economy.

Related reading from Relocate Global

"Although consumer-facing services are still below their pre-pandemic levels, its important to remember that this category includes commuter travel so will have been permanently affected by the shift to homeworking," she said."And while many people are undoubtedly feeling the pressure on household bills, the much publicised weakening in retail sales is also partly offset by consumers switching back to spending on the separate category of tourism travel."

Impact on interest rates

Ms Ussher felt there was nothing in the ONS data to prevent the Bank of England from continuing to raise interest rates when it meets over the summer.Suren Thiru, Economics Director for the Institute of Chartered Accountants, warned that the UK economy remained “perilously close to recession”."The latest figures confirm that there was a better than expected rally in economic activity in May. While all sectors reported solid growth, the key services sector was the largest contributor to overall GDP growth, reflecting a large rise in GP appointments," he said."Solid growth in May should be followed by a notable drop in output in June as the working days lost due to the Jubilee bank holiday and surging inflation – including from record fuel prices – drag on activity."While targeted fiscal support is required to protect people and businesses who are being hardest hit, more focus is needed to ease the supply side constraints that continue to stoke inflation and limit economic activity."

'Subdued economic momentum'

Ben Jones, Lead Economist at the Confederation of British Industry (CBI), Lead Economist, described GDP data as "volatile" at the moment. “This is in part due to the impact of the Jubilee bank holidays, and this noise will continue to obscure the true state of the economy over the next few months. In reality, CBI surveys and real-time data point to subdued economic momentum," he said.“The priority of the next prime minister must be getting the economy growing again. Tax policy is an important part of this, but we need tax changes that drive investment rather than fuel inflation. “Yet growth policy is about more than this and concerns the policies of virtually every department. Only a broad plan can be effective.”

'Imbalances in economy'

David Bharier, Head of Research at the British Chambers of Commerce (BCC), said that while the GDP growth figure came as welcome news, it masked serious, underlying issues of growing imbalances within the economy.“The construction sector continued to show buoyancy with a seventh consecutive rise in monthly growth," he said. “The services sector grew by 0.4 per cent but the main contributing factor, health and social work activities, was driven by a significant rise in GP appointments. Elsewhere, consumer-facing sectors continue a downward trend with a further 0.1 per cent contraction."He added that research by the BCC had shown that, since the start of the Covid-19 pandemic, most small businesses have reported no improvement in cash flow or investment."Uncontrolled inflation has now made it much more challenging for these firms to return to growth," he said.“Worryingly, our most recent quarterly economic survey also showed that longer term business confidence measures have begun to fall. The present political instability will have only exacerbated uncertainty among small firms.“Alongside this, the economy is still facing massive structural issues – including uncertainty about the UK’s relationship with the EU, continued Covid lockdowns in China, supply chain breakdowns, and rocketing energy costs."