UK economy bounces back from recession

There is more good news for the UK economy this week, GDP for Q1 was higher than expected at 0.6%, the market had expected a reading of 0.4%. This is the strongest rate of growth since Q4 2022, and GDP per capita also rose for the first time in seven quarters. The interesting part of this report was that growth was broad based. Private consumption was higher, investment was much higher than expected and expanded by 1.4% in Q1 vs. exp of a 0.3% decline. This also boosted business investment, which grew by 0.9% in Q1. Trade remains weak, however, the larger decline in imports vs. exports, imports fell 2.3% last quarter, vs. exports’ decline of 1%, meant that trade was less of a drag on growth than usual.

Added to this, March data for industrial and manufacturing production was also better than expected, rising 0.2% and 0.3% on the month respectively. The monthly index of services was also higher by 0.5%, with the quarter-on-quarter rate rising by 0.7%, suggesting that serves remain a powerful driver of the UK economy and the UK consumer’s resilience in the face of inflation and elevated interest rates is impressive.

The quality of growth in this report may cheer the market. Although construction output fell in the first quarter, the UK’s economy is not being fired up by government spending. This is important when the UK needs to control its debt levels. Government spending rose by 0.3% in the quarter, less than the 0.6% expected. After the drubbing the Conservative Party received at the local elections last week, the Conservatives could be either: 1, gearing up for more spending, or 2, questioning if its worth it as some signs still point to a Labour victory at the next general election. The relatively restrained government spending in the UK is in contrast to the US, where the government continues to spend at pace, which is having a big impact on growth.

Production bounces back

The ONS reported that production rose by 0.8% in the quarter, higher than the rate of service growth, and the GDP deflator was 4% YoY. GDP per capita is also back in positive territory at 0.4%, after registering flat growth for the past several quarters. This is another positive boost for the UK economy, although it is still 0.7% lower than it was a year ago.

Hotels and restaurants are out, but consumers are still spending

The make-up of service sector growth was worth noting. 11 of the 14 sub sectors registered growth, the largest contributor was transport and storage. In contrast, there were declines in accommodation services and the food service industry. Strong credit card spending helped to fuel retail trade in Q1. In the production sector, transport, metals and food production all registered strong growth.

The market reaction

The market reaction has seen the pound rise convincingly back above $1.25, and the pound is currently the strongest currency in the G10 FX space in the last 24 hours. The latest growth data should give UK stocks a boost, although the BOE’s upgraded forecasts for GDP are likely to give a positive boost to stocks in the longer term. The BOE meeting didn’t really shift the dial for the prospect of a June rate cut. The market has placed a 45% probability of a rate cut in June, although the stronger growth data and the deflator, which was 4%, could trigger a slight reduction in expectations of a rate cut next month.