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UK economy returns to growth in May despite cost of living crisis

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·4-min read
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Britain's economy grew in May despite the cost of living and rampant inflation. Photo: James Manning/PA
Britain's economy grew in May despite rapidly rising cost of living and rampant inflation. Photo: James Manning/PA

Britain's economy grew by more than expected in May, with a bounce back across all sectors despite the cost of living crisis.

Gross domestic product (GDP) expanded 0.5% from April when output declined 0.3%, according to the Office for National Statistics (ONS). Economists polled by Reuters had predicted the economy to stagnate.

Monthly GDP is now estimated to be 1.7% above its pre-pandemic levels. The economy increased by 0.4% in the quarter to May, and by 3.5% in the 12 months to May.

The ONS said health was the main contributor, with services output up 0.4% as human health and social work activities grew by 2.1%.

There was a "large rise in GP appointments" during the month, which offset the scaling down of the NHS test and trace and COVID vaccination programmes, it said.

"The economy rebounded in May with growth across all main sectors," ONS director for economic statistics, Darren Morgan, said.

Read more: UK's 'toxic' mix of low growth and high inequality leaving families £8,800 poorer

Housebuilding and office refurbishment pushed the construction sector to its seventh consecutive monthly growth, up 1.5%.

Production rose by 0.9%, driven by growth of 1.4% in manufacturing and 0.3% in electricity, gas, steam and air conditioning supply.

Chancellor of the exchequer, Nadhim Zahawi said: "It’s always great to see the economy growing but I’m not complacent. I know people are concerned so we are continuing to support families and economic growth.

"We’re working alongside the Bank of England to bear down on inflation and I am confident we can create a stronger economy for everyone across the UK."

UK monthly economic growth. Chart: Office for National Statistics
UK monthly economic growth. Chart: Office for National Statistics

However there are still signs of trouble ahead as output in consumer-facing services fell 0.1%, driven by a 0.5% fall in retail trade, while non-consumer facing services grew by 0.5%.

Inflationary pressures could cause growth to falter despite a 0.5% GDP rise in May, Morgan said.

Speaking on BBC Radio 4’s Today programme, he said: "Between May and June, half of businesses reported an increase in the price of goods and services they’d bought, but only just under a fifth said they’d increased the price of goods and services they sell.

"A lot of businesses are not really passing on the price increases they are experiencing and they are expecting those price increases to continue.

“If we move on to households, nine in ten people reported that their cost of living continues to increase."

Meanwhile, Ben Jones, lead economist at the CBI business group, warned of volatility in the current economic data, saying "This is in part due to the impact of the Jubilee bank holidays, and this noise will continue to obscure the true state of the economy over the next few months."

Analysts have cautioned the economy will still "feel recessionary, with consumers facing a significant and prolonged fall in real incomes" and unemployment likely to tick up.

"A return to growth in May is likely to prove short-lived. Just as the loss of a public holiday supported growth in May, shifting the day off to the following month, plus the Platinum Jubilee bank holiday itself, will have weighed on economic output in June," Martin Beck, chief economic advisor to the EY ITEM Club said.

"Combined with the weak start to Q2, it's very likely that GDP shrank in the second quarter. But with Q3 having a full complement of working days, the economy should, this year, avoid the two successive quarterly falls which define a technical recession."

Read more: What is stagflation and can it lead to a recession?

The economy has recently been running into the biggest headwinds since the 1970s after suffering unprecedented shocks including, rampant inflation, slow growth and labour market shortages.

In the UK, inflation hit a fresh 40-year high of 9.1% in May, nearly five times the Bank of England’s 2% target, driven by higher fuel and food prices, and the energy price cap jump.

Meanwhile, real wages adjusted for inflation are now falling at the fastest pace in 20 years.

Separate figures from the Office for National Statistics in June showed regular pay excluding bonuses plunged by 3.4% in April after inflation, marking the biggest decline since records began in 2001.

The Bank expects inflation to accelerate again, reaching more than 11% when energy bills rise in the autumn.

The BoE faces a challenge to balance hiking rates to tame inflation without pushing the country into recession.

Threadneedle Street has been rapidly raised rates in response, taking them from 0.1% in December to 1.25% last month, with another lift anticipated at its next meeting this month.

Experts forecast a base rate hike to 2% by September and at least 2.5% by the end of the year.

Watch: How does inflation affect interest rates?

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