The warmest May on record and a strong rebound in the construction sector pushed the UK’s month-on-month GDP growth to 0.4% in May – twice the level economists had expected.
Construction output grew by 1.9% month-on-month, its fastest rate in a year. After a wet April with flat GDP, housing and infrastructure output climbed 2.8% and 3.5% in May, respectively.
The services sector was a significant contributor, with output up 0.3% as consumers flocked to bars and restaurants, and production rose 1.9%.
Danni Hewson, head of financial analysis at AJ Bell, said: “It’s amazing what a bit of warm weather can do. As temperatures soared to record highs in May, shoppers shopped, builders built and lots of us downed a nice cold pint.”
May’s figures brought three-month GDP growth up to 0.9% – the fastest pace of growth since January 2022. Annual GDP growth to May stands at 1.4%.
Neil Wilson, chief market analyst at Finalto, said the GDP figures “hint at the existence of tailwinds for the UK economy just as the government takes office – a bit of luck on the side of Labour.”
Rob Morgan, chief investment analyst at Charles Stanley, agreed that “Labour has inherited a tepid but improving economy”. After last year’s slowdown, the UK is enjoying “a very gentle upswing in activity”.
Falling inflation combined with persistent wage growth at 6% means that households have greater purchasing power, whilst recent cuts to National Insurance and the increase in minimum wages are boosting consumer confidence further, he added.
However, Hewson warned that the economy’s prospects remain vulnerable to the vagaries of the British climate. “July is already looking a bit soggy and even if England can bring the Euros home, boosting pub profits along the way, the wet weather is likely to impact footfall on our high streets and productivity on our construction sites.”
Furthermore, better-than-expect economic growth is a double-edged sword because it makes interest rate cuts less likely.
Derrick Dunne, chief executive of YOU Asset Management, said: “These surprise growth figures for GDP, particularly considering it is the best growth over three months for more than two years, are creating a huge conundrum for the Bank of England (BoE). If the economy is beating inflation and tolerating much higher rates than it has done for over a decade, why cut?”
Robust GDP data has led to a modestly hawkish reaction in financial markets, said Sam North, an analyst at investment platform eToro, “with a slight uptick in the pound versus the dollar and a dip in bond futures”.
“The market's reaction suggests that the data may influence the BoE to maintain or tighten monetary policy, especially given ongoing concerns about services inflation and wage pressures. However, the extent of this adjustment is expected to be limited as market participants await upcoming key economic indicators, including the CPI, wage data and retail sales figures,” he explained.
Conversely, Morgan expects the BoE to cut rates sooner rather than later, now that the Consumer Prices Index (CPI) has hit its 2% target, although he thinks September is a more probable date than August for the first cut.
Overall, the economy in solid shape but it isn’t out of the woods. “The biggest danger is that inflation reaccelerates and interest rate cuts are shallower than anticipated and this acts as a brake on activity,” he cautioned.
The new government also has “some significant structural problems to deal with”, he continued. “Weak levels of investment and company formation alongside low labour force participation are impediments to economic expansion.”
Reducing friction at the border with the European Union would help, he added, as will liberalising planning laws and attracting long-term capital for investment.