The rise in activity is welcome news for the recently elected Labour Party. According to the ONS, the monthly figures for real GDP (or, to be more precise, real value added) show that UK activity rose by 0.4% m/m in May, following a levelling-off in April. Although the manufacturing sector (+0.4% m/m) and construction (+1.9% m/m) were more supportive of growth than services (+0.3% m/m) in May, it is the latter that have been driving activity over the past year, with a rebound in transport and logistics (+7.3% y/y) and a clear acceleration in ‘professional, scientific and technical’ activities (+4.1% y/y).
The PMI surveys suggest that activity will remain on a growth trajectory in Q3 2024. However, the composite index fell in June (-0.7 points to 52.3), with a drop in both the manufacturing index (-0.3 points to 50.9), which nevertheless remains above the expansion threshold, and in services (-0.8 points to 52.1). At the same time, the RICS survey for the housing sector indicates that the outlook for home sales is at its highest since January 2022.
Falling inflation, rising real wages and the prospect of further rate cuts (as early as August, according to our expectations), are leading to a very marked improvement in household confidence (GfK index up +3 points to -14 in June), taking it to its highest level since September 2021. The sub-index on the twelve-month economic outlook explains this rise, but the sub-index on the outlook for purchases of durable goods remains very low, although it improved in June.
The further rise in the household savings ratio in Q1 – to 11.1% of disposable income, the highest level excluding Covid since 2010 – illustrates the desire of households to limit their consumption, against a backdrop of uncertainty and rising unemployment. Even so, retail sales rebounded by 2.8% m/m in May, after three consecutive months of decline.
In the short term, therefore, the situation is rather favourable for the new government, which nevertheless remains confronted with major structural challenges and an economy that is still on a relatively weak growth trajectory, with growth expected to average just 0.8% p.a. in 2024, according to our current forecasts.
Article completed on 12/07/2024
