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Economy ‘holds up well’ as May GDP grew 0.5%

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The UK economy grew 0.5% in May, above the flat rate of growth expected for the month.

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.

May’s figure defied the 0% growth consensus, and on a quarterly basis, recorded growth of 0.4%. Over the year, GDP grew by 3.5%, slightly down from 3.7% to April 2022.

Monthly GDP is now estimated to be 1.7% above its pre-coronavirus (Covid-19) pandemic levels (February 2020).

The figures from the Office for National Statistics revealed that manufacturing output rose by 1.4%, construction by 1.5%, production by 0.9% and services output was up by 0.4% in the month. The services output was mainly due to GP appointments which offset the scaling down of the NHS Test and Trace and vaccine programmes.

However, consumer-facing services output fell 0.1% and was 4.7% below its pre-Covid level. The figure was impacted by a fall in sports and recreation activities, though this was partially offset by an 11% increase in travel agency, tour operators and other related services.

Paul Dales, chief UK economist at consultancy, Capital Economics, said: “The surprisingly strong 0.5% rise in real GDP in May more than reversed the 0.2% drop in April and suggests that the economy is holding up well in the face of high inflation. This may encourage the Bank of England to raise interest rates by 50bps, rather than 25bps, at the next policy meeting in August.

“If GDP avoids a fall of more than 0.8% m/m in June, then it won’t contract in Q2 as a whole. Our forecast is for a decline in June of around 1% m/m, but as we think most of that will be due to the effects of the extra Jubilee Bank Holiday, a contraction in GDP in Q2 of around 0.1% q/q will be something of a statistical mirage. Either way, it now looks as though GDP in Q2 won’t be as weak as the Bank of England’s forecast of -0.3% q/q.”

Derrick Dunne, CEO of You Asset Management, said while May’s reading shows “small pockets of positivity”, the data “unfortunately does not detract from the fact we are in a hugely challenging and rapidly evolving environment”.

He said: “Last week’s political resignations compound these issues. While reports of Boris Johnson stepping down might have spurred a temporary uplift for the pound, the process to appoint our next Prime Minister will create yet more volatility within markets.

“Against this backdrop, rumours of a recession become ever more rife, with pressure mounting on the Bank of England to tame inflation without snuffing out economic growth. Navigating the underlying economic conditions has become increasingly more treacherous for investors, but not impossible.”

UK CPI inflation reached 9.1% in May, and is projected to increase further to slightly above 11% by October.

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