Growth and inflation figures in the UK have surprised favourably in the first semester. The first estimate of real GDP for the second quarter, unveiled by the ONS in mid-August showed a 0.6% quarterly increase. This follows a 0.7% increase in the first semester, which interrupted two consecutive quarters of contraction. Inflation fell a touch below 2% in May and June, before increasing back to 2.2% in July.
These developments are of course welcome, but do not reflect a genuine recovery in the UK economy. Core inflation, excluding energy and food, is slowing only moderately, underpinned by a significant and widespread increase in wages across the country. As expected, the Bank of England cut interest rates by 25 basis points on 1st August. The members from the Monetary Policy Committee were very divided, with five members asking for a rate cut and four asking for a statu quo.
In addition, the growth figures for the first semester were mainly driven by volatile components, mainly net exports in the first quarter and business inventories in the second quarter. Household consumption also increased during this period, but to a very limited extent. Actually, household spending in the first semester of 2024 was lower than it was during the same period in 2023, even if inflation has slowed and employment numbers have improved.
Although aggregate wages are increasing at a steady pace, British households are at this stage arbitrating in favour of an accumulation in savings. The rise in people claiming unemployment benefits and the recent increase in mortgage arrears are additional obstacles to the recovery in domestic consumption. Given the size of the previous increases, the recent cut in interest rate by the Bank of England is not enough to really release the pressure on the household finances.
Although growth overall in 2024 should be significantly better than in 2023, the recovery of the UK economy since the COVID remains comparatively more limited than most other developed economies.
