The UK economy grew 0.4% in May, beating analysts' expectations, the Office for National Statistics reported. The positive news coincided with the British pound hitting its highest level in four months against the US dollar.
Economists polled by Reuters had forecast a 0.2% rise in GDP for May, but actual growth figures doubled those expectations. After a mild recession in the first quarter and a plateau in April, the U.K. economy has shown resilience in this recent recovery.
The services sector, a significant contributor to the economy, grew by 0.3%. In addition, manufacturing and construction rebounded, posting increases of 0.2% and 1.9%, respectively.
By 8.30am in London, the pound had risen 0.14% against the US dollar to $1.2863, its highest level since March 8, 2024, according to LSEG data.
This economic recovery is a welcome development for the newly elected Labour Party as Prime Minister Keir Starmer begins his term. The Labour victory, which included a platform focused on economic growth, housing and planning, has already led to a positive adjustment in Goldman Sachs' growth forecasts.
Analysts have described the new government as pro-business, given its strong parliamentary majority and commitment to economic development. Ashley Webb, UK economist at Capital Economics, noted the recent upward trend in GDP, suggesting that the negative impacts of high interest rates and inflation are starting to subside.
UK inflation has fallen from a peak of 11.1% in October 2022 to the Bank of England's target of 2% in May 2024. This reduction has boosted hopes of an imminent interest rate cut by the central bank. However, the Bank of England maintained a cautious stance at its June meeting, highlighting persistent concerns about inflation.
Muniya Barua, deputy executive director of BusinessLDN, stressed the need for the new government to capitalize on the economic growth figures by implementing high-impact, low-cost measures to attract private investment. These measures include overhauling the apprenticeship system and abolishing stamp duty on stock transactions.
New Finance Minister Rachel Reeves has announced several initiatives aimed at boosting economic growth, including mandatory housing targets, lifting a ban on new onshore wind farms in England and the creation of a £7.3bn national wealth fund to attract private investment in infrastructure.
Investment strategist Lindsay James of Quilter Investors noted that the business community is eagerly awaiting the first Labour Party budget, due in mid-September. Clearer tax and spending plans could spur business investment and further economic growth, although a significant acceleration in GDP could take time to materialise.