The UK economy has bounced back into growth, expanding by a modest 0.1% in May after a slight contraction in April, according to latest data from the Office for National Statistics (ONS). The services sector was the primary driver of this rebound, demonstrating its continued resilience despite ongoing economic headwinds. However, declines in both production and construction industries highlight an uneven recovery across different sectors.
April's contraction had been attributed to initial impacts of the US-Israel war with Iran on businesses. Although May's figures offer some relief, the three-month picture shows the economy growing by 0.7% compared to the preceding period. Liz McKeown, director of economic statistics at the ONS, noted that while the growth pace eased slightly in the more recent two months.
Economists attribute the boost in consumer spending to warmer weather in May, which may be extended into June and July by the ongoing World Cup. This uptick in activity is particularly beneficial for the services sector, encompassing retail, hospitality, and leisure. However, Yael Selfin, chief economist at KPMG, cautioned that this might not be sufficient to offset weaknesses elsewhere in the economy.
Concerns persist regarding potential headwinds. The recent increase in energy prices, influenced by heightened tensions in the Middle East, poses a significant risk to UK households and businesses. Higher energy costs typically translate to increased operational expenses for companies and reduced disposable income for consumers, potentially dampening future spending and investment. Furthermore, tightening financial conditions could impact borrowing costs for both individuals and businesses.
For UK households, sustained economic growth is crucial for job security and wage progression. Mortgage holders will be closely watching for implications of Bank of England interest rate decisions, as tightened financial conditions signal a reluctance to cut rates soon. Meanwhile, UK savers may see relatively higher returns on their deposits if interest rates remain elevated. Investors in the FTSE 100 will be looking for signs of sustained corporate profitability, particularly from companies with significant exposure to the UK's consumer-driven services sector.