- 0.6 per cent growth in the first quarter brings the UK recession to an end
- Will this mean a brighter outlook for UK investors?
The UK economy is officially out of recession. Data released by the Office for National Statistics (ONS) showed that GDP increased by 0.6 per cent in the first quarter of the year, bringing an end to one of the shortest and shallowest contractions on record, as the chart shows.
Services grew by 0.7 per cent on the quarter, and the production sector by 0.8 per cent. The construction sector fell by 0.9 per cent, likely a result of extremely wet weather earlier in the year.
Given strong data in the first two months of the year, the end of the recession didn’t come as much of a surprise – yet the strength of the recovery did. Days earlier, the Bank of England (BoE) forecast just 0.4 per cent growth over the period. Have economists underestimated the resilience of the UK economy? Or are we still set for a year of stagnant growth?
A brighter period ahead
Andrew Oxlade, investment director at Fidelity International, pointed out that the figures mean the economy is growing at its fastest rate since 2021, and at a similar pace to the US and Europe. Economists at Dutch bank ING also think the UK is “entering a brighter period”, with strong activity in March providing a springboard for second-quarter growth. ING forecasts suggest that growth could “easily” come in at 0.5 per cent in Q2, significantly more optimistic than the BoE’s 0.2 per cent forecast.
But we shouldn’t get carried away just yet. Big movements in the hospitality and administration sectors have made the data noisy, and the disruption of the pandemic could still be impacting seasonality adjustments. Fidelity’s Oxlade warns that it is too early to call this a return to long-term growth rates, and expects the recovery to be “painfully slow” from here.
The end of the downturn was largely priced in by investors. Far harder to judge is whether the brighter data will mean a raft of more optimistic official forecasts – or a change of course from the BoE.
Simon French, chief economist at Panmure Gordon, expects the latest data to trigger a slew of growth upgrades. The OECD expects the UK economy to grow by an anaemic 0.4 per cent in 2024, and the Office for Budget Responsibility fiscal watchdog predicts just 0.8 per cent. French sees something closer to 1.2 per cent this year. “For domestic risk assets, sterling and further improvements to sentiment, a GDP upgrade cycle – even a modest one by historical standards – should be constructive”, he says. The FTSE 100 hit fresh highs in early trading on Friday 10 May after the GDP data was announced.
More vexing is the question of whether stronger GDP data will persuade BoE rate-setters to delay rate cuts this year. Buoyant growth will do little to calm concerns about persistent domestic price pressures, but inflation figures will ultimately carry more weight. Immediately after the release, markets priced in a 45 per cent chance of a first rate cut in June, while sterling moved slightly higher on the suggestion that UK interest rates could stay higher for longer.
Even if rate cuts are delayed until August, the BoE is still expected to move before the Federal Reserve. Vivek Paul, UK chief investment strategist at BlackRock Investment Institute, expects the BoE to cut more aggressively than the Fed over the next two years thanks to the UK’s relatively weaker growth outlook. As interest rates fall, coupon payments start to look more attractive, driving up bond prices, with yields moving inversely. After the latest BoE meeting, Paul said that “on a long-term horizon, we prefer UK gilts to other developed market bonds”.
What the figures mean for the election
GDP data shouldn’t be the only piece of good economic news this month: figures released next week are expected to show that inflation has returned to the 2 per cent target.
Meanwhile, chancellor Jeremy Hunt hailed the latest GDP figures as “proof that the economy is returning to full health for the first time since the pandemic”.
Unsurprisingly, rivals are less positive. Shadow chancellor Rachel Reeves said that it was “no time for Conservative ministers to be doing a victory lap”, adding that the economy was “still £300 smaller per head” than when Rishi Sunak became prime minister. Even Panmure Gordon’s optimistic 1.2 per cent growth projections would leave the UK economy in the bottom half of the OECD pack this year. A brighter outlook for the UK economy is certainly welcome, but it might not feel like enough of an improvement to voters.
