UK economy exceeds growth expectations in May

UK economic growth: The British economy grew faster than anticipated in May, providing a boost for Prime Minister Keir Starmer's new government but raising doubts about the likelihood of a Bank of England (BOE) interest rate cut next month.

Economic output increased by 0.4 per cent in May, following a 0.2 per cent rise in April, according to the Office for National Statistics. Economists polled by Reuters had forecast another 0.2 per cent monthly increase.

The unexpected economic strength has cast doubt on the BOE's potential rate cut on August 1. This week, three policymakers highlighted strong domestic price pressures. Consequently, the chance of a rate cut in three weeks dropped below 50 per cent in early trade on futures markets on Thursday, down from just above 50 per cent on Wednesday.

May's growth was broad-based, with the services, manufacturing, and construction sectors all expanding. Construction saw a 1.9 per cent increase, driven by house-building.

These figures offer an early boost to the new Labour administration, which aims to achieve the fastest sustained growth among the Group of Seven advanced economies.

"The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate," said Ashley Webb, an economist with consultancy Capital Economics.

Over the three months to May, the economy grew by 0.9 per cent, the strongest reading since the three months to January 2022, surpassing the consensus forecast of 0.7 per cent growth. The BOE had predicted a 0.5 per cent growth for the second quarter, a figure that now seems conservative.

"These GDP figures may make an August rate cut less likely by providing those rate setters who are concerned about underlying price pressures with sufficient confidence about the UK's economic recovery to continue putting off loosening policy," said Suren Thiru, economics director at accountancy body ICAEW.

(With Reuters inputs)