UK GDP growth 'could keep interest rates high'

UK GDP growth represented by two people exchanging a £20 note

UK GDP growth was recorded as 0.1% in February 2024 (Image: Jason Alden/Bloomberg via Getty Images)

(Image credit: Getty Images)

published 12 April 2024

UK GDP growth of 0.1% was recorded in February, initial figures from the Office for National Statistics (ONS) have shown.

The small month-on-month rise followed estimated growth in the UK economy of 0.3% in January. The figures suggest the UK exited its technical recession at the start of 2024 - although preliminary figures will not confirm it until mid-May.

The news has come as a boon to Prime Minister Rishi Sunak, who has pledged to grow the economy. His Chancellor of the Exchequer, Jeremy Hunt, said the latest data was evidence that “the economy is turning a corner” and insisted the country would see more growth “if we stick to our plan”.

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However, economic growth remains weak. Last year, the economy grew 0.1% despite the UK entering a recession in the second-half of the year. The latest figures suggest a meaningful rise in GDP could be some way off, with analysts warning there is little momentum in the economy.

It comes as households continue to grapple with the worst cost of living crisis in a generation. Inflation remains above target, while the Bank of England has frozen interest rates at a record high for eight months.

UK GDP growth held back by 'soggy February and Middle East crisis', ONS says

The February GDP increase was driven by the production sector, which is calculated to have grown 1.1% month-on-month. Manufacturing grew 1.2% compared to January, with transport equipment (such as car manufacturing), and food and drink production leading the way. The manufacture of gas also performed strongly.

The services sector also helped to generate UK economic growth. Transportation and storage (such as freight services), as well as information and communications (including telecoms), both grew.

But wholesale and retail trade, and the repair of motor vehicles and motorcycles sector, were laggards on this growth, recording marginal declines. Wet weather and supply chain disruption resulting from the crisis in the Red Sea and wider Middle East region were both raised as common themes for why these sectors struggled, the ONS said. Indeed, it found 50% of businesses in the UK economy stated the "conflict in the Middle East" had restricted their activities.

Overall, the largest check on UK growth came from the construction sector. Exclusive MoneyWeek analysis of official new build statistics has already shown that the sector ground to a halt over the last three months of 2023. These woes appear to have continued into 2024, with output estimated to have fallen 1% in the three months to February and 1.9% compared to January.

The amount of new work tumbled 3% over the three-month period (2.3% month-on-month), with infrastructure leading the drop with output decreasing 5.5%. While repairs and maintenance grew 1.6% over the three months, it fell 1.4% compared to January. The ONS said heavy rainfall is likely to have contributed to the decrease in output, as the second month of the year was the fourth wettest February on record.

All the figures are set to be revised by the UK’s official statistics body, which continues to gather data over a period of several months.

UK GDP growth to keep interest rates higher for longer?

While February’s GDP growth has been welcomed, analysts have warned it won’t necessarily translate into good news for everyone over the shorter term, including mortgage payers.

Ed Monk, associate director at Fidelity International, said the latest ONS statistics showed that “UK growth remains weak” and said the figures “won’t change the feeling that there is very little momentum in the economy”. He added: “If today’s reading is positive for growth overall it may end up being bad news for both borrowers and financial markets, in the short term at least.

“Both are waiting for the Bank of England to cut rates but wage rises and now better performance in parts of the economy are adding to inflationary pressures. Expectations of rate cuts this year have softened and markets now expect only two cuts before 2025. It seems you can have a recovering economy, or you can have the relief of lower rates - but you can’t have both at the same time.”

Monk was echoed by Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, who said: “While recession concerns are disappearing into the rear-view mirror, the longer-term outlook is still difficult, with the lagged impact of earlier interest rate hikes and chronic supply side constraints likely to continue limiting the UK’s growth potential.

“This GDP increase may give those rate setters still concerned about persistent price pressures sufficient reassurance on the economy to keep interest rates higher for longer than many expect.”

Their comments have come after warnings about US inflation sparked concerns the Federal Reserve could significantly raise interest rates on the other side of the Atlantic - an action that may potentially create a headache for the Bank of England. They also follow a separate warning from the UK central bank’s Monetary Policy Committee member Megan Greene, who said rate cuts from the Bank of England “should still be a way off’ due to inflation.

However, Sanjay Raja, the chief UK economist at Deutsche Bank, sounded a more positive note. He said: “The outlook is brighter than it was a few months ago. Fiscal offsets are already in motion and we expect the MPC to gradually dial down the level of restrictiveness in monetary policy.

“With inflation dropping like a stone, real disposable incomes will support household spending and business investment further through the year. We see GDP expanding by 0.5% this year, and pushing as high as 1.5% next year.”

James Smith, the developed markets economist at ING Economics, appears to agree. He said: “The bottom line is that we’re likely to see growth rates remain positive throughout 2024 and potentially gain momentum into the second half of this year.

“We shouldn’t expect fireworks though, and we don’t think the growth outlook is going to have much bearing on the timing of the first Bank of England rate cut. That’ll be determined primarily by services inflation and wage growth. And with the potential for a bit of stickiness in the former in the near term, we’re still narrowly favouring an August rate cut over June.”

Henry Sandercock has spent more than eight years as a journalist covering a wide variety of beats. Having studied for an MA in journalism at the University of Kent, he started his career in the garden of England as a reporter for local TV channel KMTV.

Henry then worked at the BBC for three years as a radio producer - mostly on BBC Radio 2 with Jeremy Vine, but also on major BBC Radio 4 programmes like The World at One, PM and Broadcasting House. Switching to print media, he covered fresh foods for respected magazine The Grocer for two years.

After moving to NationalWorld.com - a national news site run by the publisher of The Scotsman and Yorkshire Post - Henry began reporting on the cost of living crisis, becoming the title’s money editor in early 2023. He covered everything from the energy crisis to scams, and inflation. You will now find him writing for MoneyWeek. Away from work, Henry lives in Edinburgh with his partner and their whippet Whisper.