Sky’s Ian King explains that the signs for growth in the coming months appear more positive, especially with the Bank of England set to ease pressure on consumer spending within months.
After a very strong start to 2024, in which the British economy achieved its strongest growth in two years, the situation stagnated again in April.
That’s the economy flat in April however, was not a surprise given a number of factors.
One of these was the early timing of Easter, which shifted some of the consumer spending that would normally have occurred in April to March.
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The other, more relevant factor was the weather.
The Office for National Statistics notes in its release that rainfall in April was 155% higher than the long-term average, making it the wettest April in more than a decade.
The arrival of Storm Kathleen at the end of the first week of April brought heavy rain to Scotland, Wales, parts of Northern Ireland and the West Country. Things were even worse in some parts of the country, with Edinburgh experiencing its second wettest April in 188 years. The last few weeks of April were also noticeably cooler than normal.
All that appears to have affected a wide range of sectors in the economy, including retail, construction – which was particularly hit by high winds – and pubs, restaurants and cafes.
The good news for the Prime Minister is that the economy grew by 0.7% in the three months to the end of April. That represents a modest amount of momentum carried over from the first three months of the year and is still a pretty reasonable amount considering the recent past.
The better news is that things will likely improve by May. Survey data for May, particularly the forward-looking purchasing managers’ index (PMI), suggests that the services sector – which makes up just over three-quarters of UK economic activity – continued to grow during the month, while manufacturing appears to have returned. also growth.
British economy flattens in April
May’s manufacturing PMI reading was the best since July 2022. Other measures of activity pointing to stronger growth in May include data published by the British Retail Consortium, which pointed to a monthly on-month increase in retail sales, helped by solid trading over the first Bank Holiday weekend of the month.
This should come as no surprise: headline inflation is falling – albeit not yet fast enough to convince the Bank of England to cut rates – while the latest National Insurance cuts will have filtered through to pay packets by the end of April and could have contributed to more confidence among consumers. At the same time, as shown in the wage data published on Tuesday this week, average incomes continue to grow faster than the overall inflation rate.
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Add to this the expected boost to the economy from the European Football Championships and the Olympic Games, and consumer spending should continue to grow in June and July. Meanwhile, the manufacturing sector also looks set to continue its recent upturn in activity as Britain’s major trading partners in Europe and the United States also see a recovery in demand.
As Sanjay Raja, the chief UK economist at Deutsche Bank, put it in a note to clients this morning: “April’s flat print is likely to be temporary. And what’s more, we continue to see GDP maintain its upward momentum through the remainder of the year. Our updated models indicate quarterly GDP growth of 0.3-0.4% in the second quarter of 2024.
“Certainly, there is a cyclical recovery underway. A strengthening of real disposable income will likely give way to a strengthening of household consumption.”
Raja thinks the economy will grow by 0.8% this year.
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Meanwhile, there will be an interest rate cut from the Bank of England. Given the rise in unemployment over the three months to the end of April, the Bank of England may have been tempted to follow the lead of the US economy. European Central Bank and cut interest rates next week if there was no general election.
As things stand, a rate cut in August now seems very likely.
All of this should continue to stimulate growth through the summer and into the fall.
All this makes Rishi Sunak’s decision to leave the country early increasingly strange.