The UK economy experienced a strong start to 2024, with its strongest growth in two years. However, this momentum came to a halt in April. The Office for National Statistics cites two main factors for this economic flatlining during April.
One factor was the early timing of Easter, which led to a shift in consumer spending from April to March. The other significant factor was the unusually severe weather. According to the Office for National Statistics, April had 155% more rainfall than the long-term average, making it the wettest April in over a decade. Storm Kathleen, which hit in the first week of April, brought heavy rain to Scotland, Wales, Northern Ireland, and the West Country. Edinburgh experienced its second wettest April in 188 years.
The last two weeks of April were also notably cooler than usual, which had an impact on various sectors of the economy, including retail, construction, and hospitality. The Prime Minister, while facing some challenges, can take comfort in the fact that the economy still grew by 0.7% during the first three months of the year. This indicates a modest level of momentum from the previous quarter and is a reasonable pace considering recent economic conditions.
Furthermore, survey data for May, particularly the forward-looking purchasing managers index (PMI) survey, suggests that the services sector, which makes up over three quarters of the UK economy, continued to expand. Additionally, manufacturing is also expected to have returned to growth in May, with the PMI reading for manufacturing being the highest since July 2022. Other indicators such as the British Retail Consortium’s data also point to a month-on-month increase in retail sales, thanks to solid trading over the first Bank Holiday weekend in May.
This upward trend can be attributed to several factors, including a decrease in the headline rate of inflation, recent reductions in national insurance, and strong average earnings growth, as shown by Tuesday’s wages data. Consumer spending is also expected to receive a boost from major events such as the European football championships and the Olympic Games.
Manufacturing is also set to continue its recent uptick in activity, as the UK’s main trading partners in Europe and the United States also experience a recovery in demand. According to Sanjay Raja, chief UK economist at Deutsche Bank, this cyclical recovery is underway, and GDP is expected to maintain its upward momentum throughout the rest of the year. Deutsche Bank’s updated models predict a GDP growth of 0.3-0.4% quarter on quarter in the second quarter of 2024, with Raja forecasting a 0.8% growth for the entire year.
Meanwhile, the Bank of England is expected to implement an interest rate cut in August, following the lead of the European Central Bank. The recent uptick in unemployment during the first quarter of 2024 may have tempted the Bank to cut interest rates next week, but with the upcoming general election, it is now more likely to happen in August.
Overall, these factors are expected to keep the economy ticking over during the summer and into the autumn. However, the decision of Chancellor Rishi Sunak to call for an early election remains perplexing in light of these positive economic indicators.