Sky’s Ian King explains how signs of growth are shaping up in the coming months, especially as the Bank of England eases pressure on consumer spending over the months.
After a very strong start to 2024, during which the UK economy posted its strongest growth in two years, things stalled again in April.
That is, the economy compared during April however, it was not a surprise, given several factors.
One was the early timing of Easter, which led to some consumer spending that would normally occur in April being pushed to March.
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Another, more important factor was the weather.
The Office for National Statistics notes in its report that rainfall during April was 155% above the long-term average, making it the wettest April in more than a decade.
The arrival of Storm Kathleen at the end of the first week of April brought heavy rain to Scotland, Wales, parts of Northern Ireland and the West Country. It was even worse in some parts of the country, with Edinburgh experiencing its second wettest April in 188 years. The last few weeks of April were also significantly colder than usual.
All of this appears to have affected a wide range of sectors in the economy, including retail, construction – which was particularly affected by the strong winds – and pubs, restaurants and cafes.
The good news for the prime minister, as he is, is that the economy grew by 0.7% in the three months to the end of April. This represents a modest amount of momentum carried over from the first three months of the year, and is still a pretty reasonable clip given the recent past.
The better news is that the situation is likely to pick up in May. Survey data for May, particularly the forward-looking Purchasing Managers’ Index (PMI), suggested that the services sector – which accounts for just over three-quarters of UK economic activity – continued to expand during the month, while manufacturing appeared to be making a comeback. to growth as well.
The British economy stagnated in April
May’s manufacturing PMI results were the best since July 2022. Other activity indicators pointing to stronger growth during May include data released by the British Retail Consortium, which pointed to a month-on-month rise in retail sales, helped by solid trading over the first bank holiday weekend in months.
This should come as no surprise: the headline rate of inflation is falling – although not fast enough to convince the Bank of England to cut interest rates – while the latest cut in National Insurance will be reflected in pay packets at the end of April and could serve to instilled a little more confidence among consumers. At the same time, as wages data released on Tuesday this week showed, average earnings continue to rise faster than the overall rate of inflation.
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Add to that the expected boost to the economy from the European football championships and the Olympics, and consumer spending should continue to rise in June and July. Meanwhile, manufacturing also looks set to continue its recent upturn in activity as the UK’s main trading partners in Europe and the United States also see a recovery in demand.
As Sanjay Raja, Deutsche Bank’s chief UK economist, said in a note to clients this morning: “April’s flat print is likely to be temporary. Moreover, we continue to see GDP maintaining its upward momentum for the rest of the year.” Our updated models point to quarter-on-quarter GDP growth of 0.3-0.4% in the second quarter of 2024.
“There is definitely a cyclical recovery going on. A firming in real disposable income is likely to give way to a firming in household consumption.”
Mr Raja thinks the economy will grow by 0.8% this year.
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Meanwhile, interest rate cuts from the Bank of England are looming. With unemployment rising in the three months to the end of April, it is possible that the Bank of England may have been tempted to follow suit European central bank and cut interest rates next week if there was no general election.
A rate cut in August now appears highly likely.
All of this should continue for growth to continue through the summer and fall.
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