UK GDP declines by 0.1% in May as financial institution holidays sluggish financial system
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ears of a recession this 12 months proceed to loom over the UK financial system, as official figures immediately revealed the UK financial system shrank by 0.1 per cent in May.
However, the additional financial institution vacation for the King’s coronation meant a decline in GDP was extensively anticipated, with the figures introduced by the ONS immediately being higher than the 0.3 per cent contraction economists projected. Paul Dales, chief UK economist at Capital Economics, stated that if the affect of the coronation was much like the Queen’s funeral, then GDP may need grown by 0.2% if not for the additional break day.
Given that the decline will be defined by the third financial institution vacation, it nonetheless appears unclear whether or not the Bank of England’s 13 consecutive rate of interest hikes are slowing the financial system down. Some consultants have warned that inflation has change into so embedded within the UK financial system that the one solution to carry costs below management is for the Bank of England to drive a recession.
More charge rises this 12 months are nonetheless seen as a certainty. Last week, City merchants anticipated the Bank’s Monetary Policy Committee to hike charges by one other half a proportion level when it subsequent meets in early August and projected charges to peak as excessive as 6.75 per cent. But they pared again their bets on charge hikes this week, now seeing the selection between a quarter-point and half-point charge rise subsequent month as successfully a coin toss, and the most certainly peak as 6.25 per cent.
The decline shall be a reminder {that a} recession this 12 months might nonetheless be on the playing cards. A recession is usually outlined as back-to-back quarters of GDP decline. The financial system grew barely throughout the first quarter of the 12 months, that means it must decline in each the second and third to fulfill the factors.
Muniya Barua, deputy CEO of BusinessLDN, stated: “This data shows the UK economy is at real risk of sliding into a recession. The outlook is for stubborn inflation, high interest rates and industrial unrest.”
Given the fact they had one less working day, sectors like manufacturing and construction declined. On the other hand, pubs performed well.
GDP was down by 0.4 per cent compared to May 2022.
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “The reduction in the monthly GDP figures revealed today is cause for concern but not yet panic stations, given the fall in economic activity can be ascribed almost directly to fewer working days in May due to the King’s Coronation.
“The data we saw after June and September of last year show the impact extra bank holidays can have on economic activity, something which is particularly evident this May in the subdued manufacturing, construction, and service sector output.
“This weakness in May should be understood as a one-off, and a reversal can be expected in next month’s data. However, it is yet to be seen whether this will be sufficient to deliver growth over Q2 as a whole – the expectation is it will, but only just. Most concerning are the declining figures in manufacturing and industry, which demonstrate an ongoing weakness in overall domestic activity and overseas demand for UK exports.
“This subdued economic performance is unlikely to sway the Bank of England’s interest rate-setters from a further interest rate hike in early August, however. Unless there is an improvement in productivity an economic contraction is likely, though it should be far shallower than the one experienced during the pandemic.”
In response to today’s figures, the Chancellor, Jeremy Hunt, reiterated his focus on inflation. With official GDP figures being inflation-adjusted, the economy has to grow faster in nominal terms for real GDP to grow. Inflation has remained stubbornly high in the UK at 8.7 per cent, in stark contrast with global peers like the United States, where figures yesterday revealed inflation fell to just 3.0 per cent.
Hunt said: “While an extra Bank Holiday had an impact on growth in May, high inflation remains a drag anchor on economic growth.”
“The greatest solution to get progress going once more and ease the stress on households is to carry inflation down as rapidly as potential. Our plan will work, however we should persist with it.”