Fragile UK economy set to dodge recession for now

Britain’s economy shrank by less than expected in May despite a bank holiday to mark King Charles’ coronation and strikes, suggesting a widely forecast recession caused by high inflation and surging interest rates was not already underway.

Economic output fell 0.1 per cent in May from April, the Office for National Statistics (ONS) said, after growth of 0.2 per cent in the previous month. A Reuters poll of economists had pointed to a contraction of 0.3 per cent in May.

All sectors of the economy contracted with the exception of services, which showed no growth. The pound rose modestly against the dollar on the back of the data.

Business groups said the big picture of a tepid economy remained, albeit one with stubborn inflationary pressures that means the Bank of England is likely to raise interest rates further in early August.

Britain’s economic recovery from the COVID-19 pandemic has lagged most of its peers among major advanced economies, with only recession-hit Germany having fared as badly as of the first quarter of this year.

“Our sense is that underlying activity is still growing, albeit at a snail’s pace,” Paul Dales, chief UK economist with Capital Economics, said.

The economy was on track to expand by around 0.1 per cent in the second quarter, a touch stronger than the BoE’s forecast of no change but it was likely to suffer a mild recession later in the year, Dales said.

Next Wednesday’s inflation release would probably determine whether the BoE raises rates by another half percentage point or slows down the pace to a quarter-point hike, Dales added.

Finance minister Jeremy Hunt said high inflation continued to hamper the economy and he called for patience in bringing it down. “Our plan will work, but we must stick to it,” he said.

Some companies in the arts, entertainment and recreation sector said they had benefited from the extra bank holiday, as well as hotels and restaurants, the ONS said.

But there were signs that strikes in the health, rail and education sectors had dragged on output.

The ONS said anything better than a 0.1 per cent drop in economic output for June would put the economy on track to avoid a contraction for the second quarter as a whole.

Britain’s economy often shows some rebound in subsequent months when output is temporarily dented by extra bank holidays.

Separate ONS data showed Britain’s trade-in-goods deficit widened by more than expected to 18.7 billion pounds in May, with exports to the European Union falling to their lowest level since January 2022.