The preliminary growth estimate for Q1 has not dispelled doubts about the state of domestic demand in the UK. Although inflation has fallen and real wages and household confidence have improved, British consumers are still cautious. Household consumption rose only by 0.2% q/q in Q1, offsetting a small part of the contraction recorded in the previous two quarters (-1.0% cumulatively). In addition, retail sales surprised on the downside in April, falling by 2.3% m/m in volume, following a slight drop in March (-0.1% m/m). Real GDP rose by 0.6% q/q in Q1, underpinned by positive net exports. However, the underlying dynamic was disappointing, as import volumes fell more sharply than exports.
That said, there were positive developments: all investment components grew in Q1. In particular, residential investment rebounded by 4.2% q/q, ending five consecutive quarters of contraction. This pick-up in investment in the UK residential-property market is well corroborated by solicitors' confidence surveys, which have also improved significantly since last summer: in April, the RICS index on new sales instructions climbed to its highest level in three and a half years. In addition, manufacturing activity has picked up somewhat, with the PMI index moving above the expansion threshold again in May (+2.2 points, standing at 51.3, the best level seen since July 2022). Nevertheless, the services index fell (-2.1 points, to 52.9).
Inflation has continued to come down and the dovish members of the Bank of England pushed for a quick first cut in policy rate. At the most recent meeting of the Monetary Policy Committee on 9 May, two members (Swati Dhingra and Dave Ramsden) were in favour of a 0.25 percentage points decrease. However, our forecast for a first cut in key rates was pushed back from June to August. While headline and core inflation continued to decline in April (from 3.2% y/y to 2.3% y/y and 4.2% y/y to 3.9% y/y, respectively), it is still not certain whether inflation will land on its 2% target in the short term. Price dynamics in services remained robust, with inflation slowing slightly (5.9%) and instantaneous measure (3m/3m annualised rate) rebounding from 4.5% in March to 5.3% in April.
The UK is therefore expected to post sluggish growth in 2024, held back by a slowdown to 0.2% in Q2, which is expected to stabilise at or close to this rate in H2.
Article completed on 28 May 2024
