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UK economy expected to ‘bounce back’ on services strength after April’s stagnation

A recovery in the UK's all-important services sector is expected to help push the economy back into growth in May.
A recovery in the UK's all-important services sector is expected to help push the economy back into growth in May.

A recovery in the UK’s all-important services sector is expected to help push the economy back into growth, resuming the recovery from last year’s shallow recession.

City economists expect the economy to grow 0.2 per cent in May thanks to a solid expansion in services and a recovery in construction. This would mean the economy returned to expansion after stagnating in April.

Economists pointed to figures released last month, which showed that consumers spent much more than expected on things like clothing and furniture in May. The construction sector is also likely to perform better due in part to better weather.

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Analysts at Capital Economics said they expected the “economic recovery to resume in May” while Deutsche Bank said growth would “bounce back”.

After falling into a technical recession at the end of last year, the UK recovered and was the fastest-growing G7 economy in the first quarter.

Looking at the longer term, though, the picture is less rosy. The UK’s performance since the pandemic has been lacklustre, beating only Germany among G7 economies.

The economy is just 1.8 per cent larger than it was on the eve of the pandemic. The US economy, by contrast, is 8.6 per cent larger.

The new Labour government has put restoring economic growth at the heart of its policy agenda. Speaking to Treasury officials on Friday, Chancellor Rachel Reeves said: “The central mission of this government will be to restore economic growth.”

“To deliver on this mission, I want to be the most pro-growth Treasury in our country’s history. That will mean doing what the Treasury does best – building growth on a rock of economic stability,” she continued.

Many economists think that a Labour government could be supportive to growth, particularly if the election augurs a period of political stability.

Analysts at Goldman Sachs raised their growth forecasts by 0.1 percentage points for 2025 and 2026 after the results were confirmed.

“We continue to expect that Labour’s fiscal policy agenda will provide a modest boost to demand growth in the near-term,” they wrote.

Analysts at BNP Paribas also forecast that Labour’s fiscal plans would boost growth by 0.1 percentage points, but pointed to potential positive impacts from political stability.

“Nonetheless, even if the fiscal implications may be small, a government with a large majority that ushers in a period of political stability could be supportive of growth,” they wrote.

Similarly, Rob Wood, chief UK economist for Pantheon Macroeconomics, said that a stable policy course should “unlock more business investment and attract greater foreign investment.”