UK GDP (May): A bit disappointing

GDP fell 0.1%M (month-on month) in May – so the economy shrinking very slightly - after a fall of 0.3%M in April:

1. That mechanically leaves the UK on track for a flattish Q2 (0.1%Q) assuming we get little growth in June.
2. This comes after a strong Q1 (+0.7%Q). Averaging out all the volatility and I think that you have an economy that is growing, but at a modest rate.
3. Bear in mind too that PMI business surveys sent a message of subdued private sector growth in May but did perk up in June (the composite PMI was revised up to 52).

Looking at the details for May, manufacturing production fell 1%M after a 0.7%M fall in April (though that follows relatively strong growth in Q1); Construction output fell 0.6%M (but after a 0.8%M rise in April). Services grew 0.1%M as expected. Looking at some of the sector detail for the manufacturing figures, there was likely some role for US tariffs here (cited in the case of the fall in autos production, alongside model changeovers and restructuring).

My central case isn’t for a recession. My forecast is still for positive, but not very strong growth in the UK economy. Rate cuts and positive real pay growth should help. I am, however, worried about labour market weakness and the general global backdrop won’t be helping either.

My forecast is still for positive, but not very strong growth in the UK economy.

The Bank of England forecast was for 0.25% growth over the whole of the second quarter, though that was revised up from the previous 0.1%Q estimate. The previous estimate looks more achievable after today’s figures. I am expecting further rate cuts this year as underlying inflation likely gradually reassures and as the labour market remains subdued, with the next 25bps rate cut likely next month. Today’s data probably isn’t as important to their upcoming decisions as next week’s inflation and labour market data is.

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