UK exits recession in ‘fragile’ recovery

May 10, 2024

admin Published: May 10, 2024 | Updated: May 10, 2024 3 min read

By Hanna Ziady and Anna Cooban, CNN

London (CNN) — The United Kingdom has come out of a short and shallow recession, giving Prime Minister Rishi Sunak a sorely needed boost ahead of an election expected later this year.

Gross domestic product grew 0.6% in the first three months of the year compared with the previous quarter, data from the Office for National Statistics (ONS) showed Friday.

The increase follows falls of 0.3% in the fourth quarter and 0.1% in the third quarter of last year. A recession is commonly defined as two consecutive quarters of economic contraction.

The expansion early this year was driven by “widespread growth” in the dominant service sector, where output ticked up 0.7% during the quarter after dipping late last year, the ONS said.

According to projections published Thursday, the Bank of England now expects UK GDP to grow 0.5% this year, double the pace it forecast in February. By comparison, last year, GDP increased by a measly 0.1%.

There are other signs the economy’s prospects are brightening. In April, combined output in manufacturing and services recorded the strongest rise in almost a year, according to a survey of purchasing managers compiled by S&P Global. Again, service firms drove the expansion.

However, compared with its peers, the UK economy is faring less well.

Last month, the International Monetary Fund downgraded its forecast for Britain’s economic growth this year from 0.6% to 0.5%. That is the second-slowest predicted growth rate among the Group of Seven developed economies, ahead of only Germany.

“Although there are welcome signs of green shoots, any recovery is still at an early stage and it is likely to be fragile,” said Roger Barker, head of policy at the Institute of Directors, a business lobby group.

Looming election

Still, the evidence of growth this year will provide some relief to Sunak and his ruling Conservative Party, which suffered heavy losses in local elections last week, boding ill for the party’s chances in the general election. Sunak underwent further embarrassment this week when one of his lawmakers defected to the opposition Labour Party.

Jeremy Hunt, the UK finance minister, said in a statement that the growth figures were “proof that the economy is returning to full health for the first time since the pandemic.”

But Rachel Reeves, his counterpart in the Labour Party, said that, despite the uptick in GDP, British households were still struggling.

“Food prices are still high, families are paying more on their monthly mortgage bills and working people are worse-off,” she wrote in a post on X. “From no growth to low growth — is that really the scale of the Conservatives’ ambitions?”

According to polls, the Labour Party is on track to roundly beat the Conservatives in the general election. In a survey conducted this week by YouGov, 48% of respondents said they intended to vote for Labour in the election, compared with 18% for the Conservatives.

Inflationary pressure?

Mortgage rates may also stay high for longer if a return to economic growth delays the interest rate cuts widely expected this year.

“Stronger GDP growth raises the risk of stronger demand pressures on inflation,” analysts at Nomura wrote in a note, adding that Friday’s GDP release “casts doubt” over a cut in June. They expect the Bank of England to start cutting the cost of borrowing in August.

Annual UK inflation came in at 3.2% last month, a sharp slowdown from a rate above 10% about a year ago. The central bank targets a rate of 2% and expects to more or less reach it in the next few months, according to Governor Andrew Bailey.

“Inflation has fallen a lot… (but) we need to see more evidence that inflation will stay low before we can cut interest rates,” he said Thursday, after the central bank announced its decision to hold official borrowing costs at 5.25%.

Bailey did not rule out an interest rate cut in June, but told journalists it was not a given and would be informed by data releases in the coming weeks on inflation and the labor market.