UK GDP was back in positive territory in May, with a 0.5% uplift, following a revised 0.2% drop in April and 0.1% dip in March. Expectations were for 0%.
In the three months to May 2022, GDP grew by 0.4%, with the services sector the biggest contributor, followed by human health and social work activities. The biggest drag on growth was the repair of motor vehicles and motorcycles.
While the news may have been an upside surprise, it did little to buoy markets, with the FTSE 100 trading down 0.7% and the FTSE 250 having wilted 0.2% by midday.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said the figures are “proof that the UK consumer base is on shaky ground, with consumer-facing services like retail trade, food and beverage, travel and transport, and entertainment and recreation, seeing output fall 0.1%. Consumer-facing services were 4.7% below pre-Covid levels”.
“While it’s positive to see a small nudge upwards in overall GDP, these figures are hardly shooting the lights out. It will take something strong to fully reverse fears the UK’s heading towards a recession in the coming year.
“Frankly, until there is a clear path out from political turmoil, the energy crisis, cost-of-living squeeze and the UK’s far-reaching productivity problems, it’s hard to see where the economy will find its take-off point.”
See also: Shock GDP contraction puts BoE balancing act under pressure
Bank of England base rate response
After two months of declines, will this unexpected GDP jump alter the Bank of England monetary policy committee’s plans for further rate hikes?
Quilter Investors’ portfolio manager Paul Craig does not think so. “The BoE will press ahead with interest rate rises as it looks to combat inflation and be seen to be doing something on a problem that it has been slow to act on.
“While the underlying data for the economy is okay at the moment, these rate rises do have the potential to tip things the wrong way and create a recession.
“The jobs market may remain strong, but the cost-of-living squeeze is yet to be truly felt and there are a lot of variables that add their own uncertainty, including who the next occupant of No.10 is.
“While any recession we do have may be short and shallow, the next few months is going to be a very difficult environment for everyone – governments, corporate and households included.
“Ultimately, quality businesses are the ones that will do best in this challenging time and for investors this is one way through the malaise.”
Figures represent just one month
Given that pay growth has not kept up with inflation, weak consumer confidence and falling business optimism, Royal London Asset Management senior economist Melanie Baker (pictured) is “expecting at least another 75bp of rate hikes by year end”.
“Energy prices remain an issue and a further large energy bill increase looks set for households in October, though the impact was eased somewhat by previously announced fiscal measures.”
She cautioned that “despite today’s stronger than expected figures, the UK economy remains at risk of recession”.
“I expect at least one quarter of negative GDP growth this year though, after this May data print, the likelihood of that quarter being Q2 has slipped.”
Opting for an equally wary tone is AJ Bell financial analyst Danni Hewson, who noted: “These figures represent just one month – albeit a crucial one because it means the quarter as a whole doesn’t meet the criteria for negative growth – but one month can never tell the whole story.
“There are headwinds that are impossible to ignore. Retailers, hospitality venues, gyms, museums and children’s play centres are all feeling the weight of high inflation. Households are strategically cutting back on their spending, which is a particular blow to the consumer services which still haven’t been able to get anywhere near their pre-pandemic glory days.”
Headline figure doesn’t tell the whole story
Charles Hepworth, investment director at Gam Investments, added: “The UK economy feels like it has been flatlining since the start of the year now and some have suggested that it is perilously close to falling into recessionary territory, but today’s print may have averted that, albeit temporarily.
“But looking through the numbers doesn’t immediately foretell better times ahead – visits to the doctors surged 15% in May and helped account for a jump in services which offset much weaker spending in retail and hospitality as the cost living crisis continues to impact consumer behaviour.
“As ever, the headline number doesn’t tell the full picture and it’s depressingly stark that the UK economy had to rely on a nation looking to improve its collective health to show any growth at all.”