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Bumper May bank holidays steer UK economy to contract

Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
Updated:
13/07/2023

UK economic growth is estimated to have fallen by 0.1% in May, following 0.2% growth in April as the three bank holidays saw workers down tools, hampering output.

Gross domestic product (GDP) measures the value of goods and services produced in the UK. It estimates the size of – and growth in – the economy.

Monthly GDP is now estimated to be 0.2% above its pre-coronavirus levels (February 2020). But when looking at GDP over a three-month period, GDP has shown no growth, according to the Office for National Statistics (ONS).

It noted that production output fell 0.6% in May after a fall of 0.2% in April, adding this was the main contributor to the fall in the month.

The construction sector fell 0.2% in May falling a 0.9% drop in April, while services output showed no growth. Meanwhile output in consumer-facing services fell 0.2% following growth of 1.1% in April.

The ONS noted that during the month of May, there were no strikes by junior doctors, but two days of industrial action was taken by nurses.

Meanwhile, the King’s Coronation added an extra bank holiday in the month and with three less working days, buying and selling, renting and operating of own or leased real estate contributed to the fall in consumer-facing services.

However, the largest positive contributor was food and beverage activities.

‘Resilient is a far cry from robust’

Danni Hewson, AJ Bell head of financial analysis, said the GDP figure “could have been much worse” as the three Bank holidays “came at the expense of economic growth”.

Hewson said: “Factories, GP surgeries and schools all shut up shop as the country celebrated the Coronation of King Charles with an extra day off, which delivered a feel-good boost but curtailed sectors from manufacturing to services.

“The fact the contraction came in at just 0.1% demonstrates the resilience of the UK economy which has been battered by inflation, interest rate hikes and strike action.

“But there’s no point looking at the picture through rose-tinted glasses because it’s crystal clear that resilient is a far cry from robust.

“Today’s figures are unlikely to sway Bank of England rate setters, though markets are increasingly split on how big August’s hike will be.”

Paul Dales, chief UK economist at Capital Economics, said next Wednesday’s inflation release “will probably determine whether the Bank raises interest rates by 25bps or 50bps in early August”.

Dales said: “Overall, the bank holiday and strikes make it hard to judge the true health of the economy. But our sense is that underlying activity is still growing, albeit at a snail’s pace. We suspect that real GDP rose by around 0.1% q/q in Q2 as a whole, but that the effect of the further surge in mortgage rates since mid-June will contribute to GDP falling in Q3 and a mild recession beginning.

“That may not prevent the Bank from raising interest rates from 5% now to 5.25% or 5.50%, but it may mean rates don’t rise as far as the 6-6.25% priced into the market.”