UK Economy Surpasses Expectations with Strong May Growth

The UK's economy grew by 0.4% in May, surpassing expectations and providing momentum for Prime Minister Keir Starmer's new government. This growth casts doubt on the likelihood of a Bank of England interest rate cut next month, as economic sectors including services, manufacturing, and construction all expanded.

The UK's economy expanded more quickly than anticipated in May, offering a boost to Prime Minister Keir Starmer's new administration but raising questions about a potential Bank of England interest rate cut next month.

According to the Office for National Statistics, economic output increased by 0.4% in May, following a 0.2% rise in April. This exceeded the 0.2% growth predicted by a Reuters poll. The strong performance adds to doubts that the BoE will cut interest rates on Aug. 1, as highlighted by three policymakers emphasizing domestic price pressures this week.

Early trade on the futures markets saw the likelihood of an August rate cut dip below 50%. May's growth was broad-based, with services, manufacturing, and construction sectors all reporting increased output. Construction, driven by house-building, grew by 1.9% month-over-month.

This performance gives the new Labour government an early boost in its ambition to achieve the fastest growth among G7 economies. Ashley Webb, an economist at Capital Economics, noted that the stronger-than-expected recovery could benefit the government.

Over the three months to May, the economy grew by 0.9%, the highest since January 2022, surpassing the 0.7% consensus forecast. The BoE had predicted a 0.5% growth for Q2, which now appears too conservative. Suren Thiru, economics director at ICAEW, stated that the GDP figures might make an August rate cut less likely as they bolster confidence in the UK's recovery.