Fears of a recession this year continue to loom over the UK economy, as official figures today revealed the UK economy shrank by 0.1 per cent in May.
However, the extra bank holiday for the King’s coronation meant a decline in GDP was widely expected, with the figures announced by the ONS today being better than the 0.3 per cent contraction economists projected. Paul Dales, chief UK economist at Capital Economics, said that if the impact of the coronation was similar to the Queen’s funeral, then GDP might have grown by 0.2% if not for the extra day off.
Given that the decline can be explained by the third bank holiday, it still seems unclear whether the Bank of England’s 13 consecutive interest rate hikes are slowing the economy down. Some experts have warned that inflation has become so embedded in the UK economy that the only way to bring prices under control is for the Bank of England to force a recession.
More rate rises this year are still seen as a certainty. Last week, City traders expected the Bank’s Monetary Policy Committee to hike rates by another half a percentage point when it next meets in early August and projected rates to peak as high as 6.75 per cent. But they pared back their bets on rate hikes this week, now seeing the choice between a quarter-point and half-point rate rise next month as effectively a coin toss, and the most likely peak as 6.25 per cent.
The decline will be a reminder that a recession this year could still be on the cards. A recession is typically defined as back-to-back quarters of GDP decline. The economy grew slightly during the first quarter of the year, meaning it would have to decline in both the second and third to meet the criteria.
Muniya Barua, deputy CEO of BusinessLDN, said: "This data shows the UK economy is at real risk of sliding into a recession. The outlook is for stubborn inflation, high interest rates and industrial unrest.”
Given the fact they had one less working day, sectors like manufacturing and construction declined. On the other hand, pubs performed well.
GDP was down by 0.4 per cent compared to May 2022.
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “The reduction in the monthly GDP figures revealed today is cause for concern but not yet panic stations, given the fall in economic activity can be ascribed almost directly to fewer working days in May due to the King’s Coronation.
“The data we saw after June and September of last year show the impact extra bank holidays can have on economic activity, something which is particularly evident this May in the subdued manufacturing, construction, and service sector output.
“This weakness in May should be understood as a one-off, and a reversal can be expected in next month’s data. However, it is yet to be seen whether this will be sufficient to deliver growth over Q2 as a whole – the expectation is it will, but only just. Most concerning are the declining figures in manufacturing and industry, which demonstrate an ongoing weakness in overall domestic activity and overseas demand for UK exports.
“This subdued economic performance is unlikely to sway the Bank of England’s interest rate-setters from a further interest rate hike in early August, however. Unless there is an improvement in productivity an economic contraction is likely, though it should be far shallower than the one experienced during the pandemic.”
In response to today’s figures, the Chancellor, Jeremy Hunt, reiterated his focus on inflation. With official GDP figures being inflation-adjusted, the economy has to grow faster in nominal terms for real GDP to grow. Inflation has remained stubbornly high in the UK at 8.7 per cent, in stark contrast with global peers like the United States, where figures yesterday revealed inflation fell to just 3.0 per cent.
Hunt said: “While an extra Bank Holiday had an impact on growth in May, high inflation remains a drag anchor on economic growth.”
"The best way to get growth going again and ease the pressure on families is to bring inflation down as quickly as possible. Our plan will work, but we must stick to it.”
