U.K.’s economy speeds up in boost for new government

Gross domestic product rose more than expected in May, a lift for newly elected Prime Minister Keir Starmer, who has pledged to raise the country’s growth rate after more than a decade of weakness.

Edward Frankl (with inputs from The Wall Street Journal)
First Published11 Jul 2024, 01:42 PM IST
U.K.’s Economy Speeds Up in Boost for New Government
U.K.’s Economy Speeds Up in Boost for New Government

The U.K.’s economy expanded more than expected in May, a lift for newly elected Prime Minister Keir Starmer, who has pledged to raise the country’s growth rate after more than a decade of weakness.

Gross domestic product rose 0.4% in May from a month earlier, data from the U.K.’s Office for National Statistics showed Thursday. That compared with 0.2% growth expected by a consensus of economists polled by The Wall Street Journal, and a better result than the flat growth in April.

The rebound in May suggests the U.K. economy has performed more strongly than expected in the first half of this year, after contracting in the second half of 2023. The most recent of a series of setbacks for the economy came in the form of a surge in energy and food prices following Russia’s invasion of Ukraine, and a sharp rise in interest rates as the Bank of England moved to tame that surge in inflation.

However, the U.K.’s economic woes stretch further back, to the global financial crisis of 2008 and 2009, and include flatlining business investment after the country’s vote in 2016 to leave the European Union.

Buoyed by a large parliamentary majority, the new government hopes to revive the economy’s fortunes, but faces a number of constraints, including high levels of debt.

“Growth…is now our national mission,” Treasury Chief Rachel Reeves said earlier this week in her first speech since taking office. “There is no time to waste.”

Reeves—the first woman to hold the post—pledged to overhaul Britain’s planning laws, build hundreds of thousands of new homes and allow onshore windfarms.

But Reeves has said the government won’t raise income taxes or sales taxes to raise funds to improve deteriorating public services, or cut long waiting lists in the country’s health system. Instead, it hopes to get more tax revenues from a more rapidly growing economy.

The Labour government has also said it will stick to fiscal rules that will likely curtail spending, including restricting the budget deficit to 3% of annual economic output and ensuring that its debts are falling relative to the size of the economy five years from now.

The government is also hoping that greater political stability will support growth. That follows a particularly turbulent period in British politics, which featured five prime ministers since the Brexit vote in 2016. A government majority of 172 legislators in the House of Commons should make for a more settled period, providing greater certainty for businesses making investment decisions, some economists say.

“Keir Starmer’s large majority and the overall gains for left-leaning parties in parliament should translate into a stable, calmer, political environment, boosting business and inward investment,” said Robert Wood, chief U.K. economist at Pantheon Macroeconomics.

After a contraction in the last six months of 2023 GDP has now grown 0.9% in the three months to May—the fastest since January 2022, before Russia’s invasion of Ukraine.

In May, industrial production expanded by 0.2% on month, while services, the recent driver of economic output, rising 0.3%. Construction grew at its fastest rate in almost a year, the ONS said.

“The economy grew strongly in May with all the main sectors seeing increases. Many retailers and wholesalers had a good month, with both bouncing back from a weak April,” ONS director of economic statistics, Liz McKeown, said.

Indeed, growth has recovered faster than expected and the economy is approaching a soft landing, the International Monetary Fund said this week, with inflation having come down to manageable levels and unemployment near record lows.

The new government could soon receive a further boost if the Bank of England cuts its key interest rate in the coming months, as investors expect it to. The IMF said that while the economy will likely grow by just 0.7% this year, growth should accelerate to 1.5% in 2025 as lowering borrowing costs and rising real incomes boost spending.

The annual rate of inflation reached the central bank’s 2% target in May, having tumbled from a high of 11.1% in October 2022.

But the BOE still held its key rate at a 16-year high last month, projecting that inflation would tick back higher in the second half of this year. Indeed, services prices, driven by strong wage growth, remain well above the headline rate of inflation, which has mainly come down through cooling energy prices on international markets.

The bank’s Chief Economist Huw Pill said Wednesday that recent data indicates inflation may remain high for longer than anticipated, even if it will likely lower its key rate in the future.

“We still have some work to do,” he said.

Write to Edward Frankl at edward.frankl@wsj.com

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First Published:11 Jul 2024, 01:42 PM IST
HomeEconomyU.K.’s economy speeds up in boost for new government

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