Despite the UK emerging from its recent recession, significant challenges remain. As the general election approaches, let’s take a look at the key points to monitor.

Economic indicators show the UK has exited its recession, demonstrating growth and resilience. Strong performances in the service and manufacturing sectors have driven this recovery, making it one of the country’s briefest downturns. With falling inflation, there is rising hope for a summer interest rate cut. However, persistent economic challenges suggest a complex path ahead for sustained growth and stability.

UK Comfortably Exits Recession

Official data confirms that the UK exited its recession, with the economy growing by 0.6% in Q1 2024, the fastest rate since Q4 2021. This represents one of the shortest and shallowest downturns on record, with a two-quarter recession and a peak-to-trough decline of only 0.4% (see Chart 1). However, despite exiting the recession, the long-term trend remains weak, with UK GDP increasing by just 0.2% annually in Q1 2024, well below the historical average of 2.3%.

The service sector was a significant driver of GDP growth, expanding by 0.7% in Q1. Retail, public transport, haulage, and health firms all performed well during the quarter. Industrial output increased by 0.8% in Q1, largely due to a 1.4% rise in manufacturing output. In contrast, construction output fell by 0.9% in Q1 due to wet weather affecting activity.

UK Inflation Drops to Three-Year Low

UK CPI inflation dropped to 2.3% in April 2024, the lowest rate since July 2021 and down sharply from 3.2% in March. However, this decline was primarily due to lower energy bills rather than a significant easing of underlying price pressures. Services inflation, an indicator of domestic inflationary pressures, was 5.9% in April, well above the historical average of 4.1% and only slightly down from 6.0% in March (see Chart 2). The headline inflation rate is expected to drop below the Bank of England’s 2% target over the summer as the 7% decline in Ofgem’s energy price cap reduces energy bills from July.

Bank of England Moving Closer to Cutting Rates

The Bank of England kept interest rates on hold for the sixth consecutive meeting at 5.25%, a 16-year high. The Monetary Policy Committee (MPC) voting split shifted to 7-2, from 8-1 at the last meeting, with a second MPC member voting for a rate cut. This suggests the Bank of England is slowly moving towards reducing interest rates.

Jobs Market Still Faltering

The UK unemployment rate rose to 4.3% in Q1 2024, the highest since spring 2023, up from 3.8% in the previous quarter. The economic inactivity rate increased to 22.1% in Q1 2024, up from 21.9% in Q4 2023, reflecting a rise in the number of people temporarily or long-term sick. Early HMRC data highlights the impact of April’s increase in the national living wage, with sectors where pay levels are lowest typically seeing the biggest increases in pay growth (see Chart 3).

UK Productivity Falls

Despite the economy returning to growth, UK productivity, as measured by output per hour worked, fell by 0.3% in Q1 2024, following a 0.9% decline in Q4 2023. Productivity is now only 1.7% above its 2019 level. Poor productivity is a major concern because it limits the economy’s ability to sustain high wages without increasing inflation. Over the past year, business services contributed the most to the decline in productivity, while manufacturing had the largest positive impact.

Implications for Accountants, Business Owners, and the Economy

Overall, these figures suggest that the UK’s exit from recession is somewhat hollow because the broader picture remains one of economic stagnation, with high economic inactivity and poor productivity limiting the UK’s growth potential.

UK Economy – What to Watch for This Month as the election looms

The next GDP figures, to be released on 12 June, may show a slowdown in GDP growth in April (from the 0.4% result in March), driven by renewed consumer caution and higher unemployment and political uncertainty. May’s inflation figures, to be published on 19 June, could see inflation return to the Bank of England’s 2% target for the first time since July 2021 as lower food prices contribute to the downward pressure on the headline rate. Ongoing concerns over inflationary pressures mean an interest rate cut is unlikely at the MPC’s next announcement on 20 June. However, if more rate setters vote to ease policy, a summer rate cut remains possible.

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