UK economy to grow at double forecast pace

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The UK economy grew by 0.4 percent in May, more than double the figure expected, driven by continued expansion in the services sector and a rebound in housebuilding.

The month-on-month rise followed zero growth in April, the Office for National Statistics said on Thursday, and beat the 0.2 percent forecast for May by economists polled by Reuters.

Sterling rose 0.7 percent to $1.2941 against the dollar, its highest in almost a year, boosted by UK GDP numbers and later-than-expected U.S. inflation data.

Strong growth in May suggests the quarterly expansion may have exceeded the Bank of England’s forecasts, complicating its decision on whether to start cutting interest rates from a 16-year high of 5.25 percent in August.

Traders in the swaps markets were evenly split on the chances of the BoE keeping rates on hold and cutting them at its August meeting.

The economic data brought UK annual GDP growth to 1.4 per cent, higher than the 1.2 per cent economists had forecast.

„Strong service consumption raises the risk that service CPI inflation may be too strong for the Bank of England to cut. [interest rates]”said Tomasz Wieladek, chief European economist at T Rowe Price. „Today’s data reduces the likelihood of a cut in August. The bank is likely to cut only once this year.

The data comes as a boost to the Labor Party, which has declared growth its „national mission” despite being recorded under the previous Conservative government.

Chancellor Rachel Reeves said: „This week I have already taken the urgent action needed to fix the foundations of our economy to rebuild Britain and make every part of Britain better. A decade of national renewal has begun and we are just getting started.

Ashley Webb, economist at Capital Economics, said: „The improving economic outlook suggests that the government may benefit as the economic recovery is stronger than most forecasters expected.”

Webb said the increase in GDP in May was the fourth increase in the past five months, „supporting the view that the twin drags on activity from higher interest rates and higher inflation are starting to fade”.

The economy has largely stagnated over the past two years, reflecting the impact of the cost-of-living crisis. In the first quarter, GDP was 1 percent lower than in the fourth quarter of 2019.

However, the economy has recovered from last year’s tech recession. Strong growth of 0.7 percent in the first quarter was the fastest expansion among the G7 group of advanced economies.

Growth in May was driven by the services sector, which expanded 0.3 percent in May and recorded its fastest growth in the three months to December 2021, when Covid-19 restrictions were still in place.

Manufacturing output rose 0.4 percent in May and construction rose 1.9 percent following a sharp contraction in April when wet weather hit.

While May was the warmest month since records began in 1884, April recorded 155 percent of the long-term average for the month, the Met Office said.