The UK economy bounced back in April as strong growth in the retail and creative industries sectors offset a slowdown in construction and manufacturing.
(Bloomberg) — The UK economy bounced back in April as strong growth in the retail and creative industries sectors offset a slowdown in construction and manufacturing.
Gross domestic product rose 0.2% after a 0.3% decline in March, when heavy rains and strikes kept consumers at home, the Office for National Statistics said Wednesday. The figures left the economy 0.3% bigger than before the coronavirus hit in 2020.
The positive start to the second quarter reduces the risk of recession for now. However, bets that the Bank of England will keep raising interest rates through the summer are adding to the prospect of a downturn later in the year as policy makers seek to tame inflation that’s running at more than four times the 2% target.
“Although GDP rebounded in April, this reflects more the reversal of the squeeze on service sector activity from poor weather in March than a meaningful improvement in our underlying growth trajectory,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales. He added that higher interest rates and an escalating tax burden meant the economy “may continue to tread water for some time.”
The pound was little changed after the data was released, slightly down on the day to trade around $1.26. That comes after a 0.8% rally on Tuesday that followed a surge in yields triggered by unexpectedly strong readings from the monthly jobs report.
Traders are pricing in the possibility of an increase in the Bank of England’s key lending rate to 6% by February — the highest in more than two decades. That’s driving up mortgage rates, adding to the pressure on household budgets.
What Bloomberg Economics Says …
“The UK economy returned to growth in April with activity continuing to show resilience in the face of the soaring cost of living and high interest rates. Still, with price pressure proving far stickier than expected, there is a growing risk the Bank of England’s fight to bring down inflation will result in a downturn later in the year.”
—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.
There were signs of households cutting back on spending in the GDP figures. Higher interest rates and the cost of living have started to bear down on the private housing sector, which was the main cause of a sharp 0.6% fall in construction. Homeowners were “hesitant to request work” on renovating and repairing their homes, the ONS said. Activity among estate agents also declined.
Consumer-facing industries grew on the month, but were still 8.7% below their pre-pandemic levels. The largest drag since Covid-19 hit has been on “domestic personnel” including maids and nannies.
“Businesses in the consumer-facing sectors will be encouraged by today’s data,” said Kitty Ussher, chief economist at the Institute of Directors. She added that the Bank of England may interpret the strength “as proof that their interest rate hikes have not yet dampened demand enough to reduce inflationary pressure, particularly when combined with yesterday’s strong labor market performance.”
Manufacturing fell 0.3% in April, with pharmaceuticals and computers dragging down the figures. Within services, four days of junior doctor strikes caused a 0.9% fall in health and social work activities.
Economists are predicting only modest growth this year. The 0.2% expansion for 2023 in the latest Bloomberg survey puts Britain on course for the weakest performance except in Germany among Group of Seven countries.
Prime Minister Rishi Sunak’s government, trailing the Labour opposition by double-digits in polls ahead of a general election that has to be held by January 2025 at the latest, noted the figures show the economy is on track.
“We are growing the economy, with the IMF saying that from 2025 we will grow faster than Germany, France and Italy,” said Chancellor of the Exchequer, Jeremy Hunt. “But high growth needs low inflation, so we must stick relentlessly to our plan to halve the rate this year to protect family budgets.”
Separate monthly trade figures from the ONS showed total goods imports to the UK were at their lowest level since December 2021, at £47.6 billion ($60 billion).
An increase in exports from March, driven by sales to non-EU countries, meant the UK’s goods trade deficit shrank to £16.2 billion from £17.9 billion a month earlier.
–With assistance from Elina Ganatra, Aline Oyamada, Joel Rinneby and Mark Evans.
(Updates with Bloomberg Economics and trade figures.)
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