GDP: UK economy exits recession

The UK is officially out of recession, according to GDP figures from the Office for National Statistics (ONS). The economy grew by 0.6% in the first three months of the year. 

This comes after it shrank by 0.3% in the final quarter of 2023. 

Analysts had said that today’s data was likely to be positive. However, at 0.6%, it came in higher than many had anticipated. This marks the fastest rate of quarterly growth in two years. Economists polled by Reuters had been expecting 0.4%. 

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“The recovery in March and across the first quarter was largely driven by robust growth in the services sector, with the lack of industrial action in the health sector in March delivering a further boost,” says Alice Haine, personal finance analyst at Bestinvest. 

Services grew by 0.7% in the first quarter, while production grew by 0.8%. This was partially offset by a 0.9% fall in the construction sector, which was impacted by the wet weather. In terms of expenditure, there were “increases in the volume of net trade, household spending and government spending, partially offset by falls in gross capital formation”, the ONS reports. 

Today’s GDP data follows hot on the heels of yesterday’s interest rate announcement from the Bank of England. The Monetary Policy Committee (MPC) held interest rates at 5.25% for the sixth consecutive time. 

Rates are currently at a 16-year high, and some have expressed concern that they are starting to bite. However, today’s GDP data suggests the economy is holding up better than expected. This could give the Bank some comfort as it continues to walk the tightrope between controlling inflation and supporting economic growth. 

Today’s data is also good news for the Conservative Party as a general election looms ever closer. In his fiscal statement back in March, Jeremy Hunt promised to deliver a “Budget for Long Term Growth”. The party will be keen to frame today’s data as the first sign of green shoots – particularly as it continues to lag behind in the polls. 

Hunt has already described today’s news as “proof that the economy is returning to full health for the first time since the pandemic”.

What’s next for the UK economy?

“After months of floundering around a flatline, growth of 0.6% will give the UK economy a real confidence boost,” says Danni Hewson, head of financial analysis at AJ Bell. “Falling inflation and rising wages have given households a bit more in the tank and they’ve upped their spend, something that will need to continue if the trajectory is to be maintained,” she adds.

Households and businesses battling with the higher cost of debt will be hoping for an interest rate cut soon. The Bank of England took on a slightly more dovish note yesterday, with MPC members voting to hold the rate by a 7-2 split. This is a shift from the 8-1 split in March. 

Governor Andrew Bailey said he was “optimistic that things are moving in the right direction”. However, the committee also pointed out that inflation remains “elevated”, and that rates would need to be “restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates”. 

Hewson also notes that the resilience the economy is displaying could give the MPC reason to keep rates on hold for a little longer. Wage growth is still coming in fairly hot, and the Bank will not want to make a decision it ends up having to reverse further down the line. 

But while things are moving in the right direction, we are not out of the woods just yet.

“We’ve not yet seen the impact of the cut to National Insurance or the increase in the national minimum wage on consumer spending patterns and there have been plenty of businesses making it crystal clear that increased wage costs would have to be passed on,” Hewson explains. 

“Those green shoots we’ve heard so much about since the start of the year have sprouted nicely, but it will only take one spring storm to damage the burgeoning flowers”, she adds. 

In terms of the base rate, markets are currently pricing in a 0.25% cut in August and another later in the year.

Today’s positive news could put a spring in the step of UK equity investors, particularly in a month where the FTSE 100 continues to hit record highs. However, while a return to growth is certainly a step in the right direction, households and investors should remember that UK growth remains fairly sluggish overall. 

The Organisation for Economic Co-operation and Development (OECD) has predicted that UK GDP will only rise by 1% in 2025 – the slowest growth rate among the G7 nations. Public investment in the UK economy is still low compared to its long-term average, and a high tax burden is having an impact on private investment too. 

Against this backdrop, the Institute of Chartered Accountants in England and Wales describes the escape from recession as a “hollow victory”, adding that “the big picture remains one of an economy struggling with stagnation, as poor productivity and high economic inactivity limits our growth potential”.