The UK economy did not grow at all in April, according to the latest GDP estimates from the Office for National Statistics (ONS).
The soggy weather was largely to blame, as April showers threatened to dampen the UK’s fragile recovery from recession. The economy shrank by 0.3% in the final three months of 2023, but returned to positive growth (0.6%) in the first three months of 2024.
Although there was no growth in April’s monthly figure, the economy is estimated to have grown by 0.7% on a three-month basis (February to April). Over both periods, the services sector was the main contributor while construction was the main detractor. Construction output has now fallen for three months in a row.
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As well as heavy rain, “the drag from higher interest rates took its toll on activity” in April, according to Alice Haine, personal finance analyst at Bestinvest. The Bank of England has been holding interest rates at a 16-year high since August 2023.
As monetary policy bites, the Bank will need to decide whether it is time to start cutting interest rates. The Monetary Policy Committee (MPC) is next due to meet on 20 June, but most experts think an August or September cut is more likely.
Prime Minister Rishi Sunak will also be watching these figures closely. The Conservatives have ridden into the election campaign wearing the economy as their battle standard – and disappointing growth figures could quickly unravel some of Sunak’s claims about the Conservatives turning the economy around.
We take a closer look at the implications for monetary policy, politics, and the cash in your pocket.
What’s going on with the UK economy?
The latest GDP figures come after the ONS revealed unemployment rose to 4.4% in the three months to April. This is the highest level since September 2021 and could be seen as evidence that higher interest rates are starting to bite.
“When borrowing costs are high, consumers are more likely to focus on covering key household bills and keeping up with mortgage and debt repayments leaving them with less spare money to spend elsewhere,” explains Haine. This can cause economic growth to stagnate.
However, while the lack of growth in April is disappointing, it is too soon to draw detailed conclusions. The February-April figure looks stronger at 0.7%, up from 0.6% in the first three months of the year.
What’s more, the ONS points out that “monthly growth rates can be volatile”. The indicator should be “used with caution and alongside other measures, such as the three-month growth rate,” it explains.
Many sectors have been showing resilience in the face of higher interest rates – so limp growth in April really could be more of a bad weather blip than a sign of things to come.
When will interest rates fall?
Will the latest GDP data spur the Bank of England on with an interest rate cut in June? It’s unlikely, according to Danni Hewson, head of financial analysis at AJ Bell. She believes the phrase “rain stopped play” is the best way to describe April’s lack of growth.
Hewson acknowledges that a worrying trend is developing in the construction sector, where output has fallen for three consecutive months. However, overall, she doesn’t think the growth outlook looks too dismal.
“No growth is better than negative growth and taken alongside the latest wage figures there doesn’t appear to be much evidence to suggest that Bank of England rate setters will feel ready to change course quite yet,” she says.
She adds: “There’s already a frisson of excitement in the air that big events like the Euros and Taylor Swift’s Eras tour will help deliver a decent boost to the economic picture by the time we get the half-year result.
“With inflation cooling and wage growth now being felt in people’s pay packets there is a sense that the momentum seen at the start of the year is likely to return.”
The story is less positive for the Prime Minister, though. Rain has been a running theme for Sunak through this election campaign. When he stood outside Number 10 in the pouring rain and called a general election, he did so on the basis that the UK economy was on the up.
In his election statement, Sunak said: “Our economy is now growing faster than anyone predicted… This is proof that the plan and priorities I set out are working.”
April’s GDP figures now give his opponents ammunition to discredit these claims – and we won’t have another GDP reading before voters head to the ballot box. What’s more, markets are now all but ruling out a June interest rate cut too.
Lower rates would have been a PR dream for the Conservatives, who have credited themselves with slowing inflation. In a recent interview, The Times asked Sunak if a vote for the Conservatives was a vote for lower interest rates, to which he replied: “Of course it is, because we are the party who has committed to bringing down inflation, which is the necessary condition for bringing down interest rates. And I think people can see we have delivered that.”
Some households may be concerned that April’s lack of growth is bad news for them, particularly coupled with the fact that unemployment has now risen to 4.4%. However, wage growth remains strong and, so far, the economy has proved resilient in the face of higher interest rates.
Although it now looks unlikely that interest rates will be cut in June, many are still hoping for a summer cut in August. Barring any major economic shocks, interest rates have likely peaked and the trajectory is downwards from here. This should ease pressure on mortgage holders and those paying off debts.
For those with a large amount of money in savings, interest rate cuts are less positive. If you don’t need the money right now, it could be a good time to fix your savings to lock in higher rates for longer.
Alternatively, if you are happy to tie your money up for at least three-to-five years, you could consider investing it in a diversified portfolio of stocks and shares. Investment markets come with risks, but they almost always outperform cash over the long term.
The Investment Association reported strong inflows into global equities in April, as investors look to take advantage of the shifting macroeconomic backdrop. Equities typically perform well when interest rates are cut, as this tends to boost the economy and earnings.
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