How your spending power could gain momentum as economy stabilises

Consumers should expect a continued improvement in their household budgets and appetite to spend, while businesses are calling for more support to boost their contribution to economic growth, after the latest temperature check of the UK economy showed no growth in April, but a sunnier picture for the second quarter as a whole.

New data from the Office for National Statistics found that gross domestic product (GDP) was flat during the month after wet weather dampened consumer spending, following growth of 0.4 per cent in March, and in line with economists' expectations.

The sluggish momentum follows an estimated 0.6 per cent GDP growth in the first quarter of 2024, pulling the UK out of a small recession at the end of last year, while real GDP is, on a quarterly basis, estimated to have grown by 0.7 per cent in the three months to April from the prior quarter, and amid inflation currently sitting at 2.3 per cent. Chancellor of the Exchequer Jeremy Hunt said: "There is more to do, but the economy is turning a corner, and inflation is back down to normal."

Luke Bartholomew, deputy chief economist at asset-management giant Abrdn, was among those to state that monthly GDP data can be volatile, and urged an examination of the broader trend across several months. He added: "And on that measure, a picture of solid recovery from last year's recession emerges. This should continue as the year progresses, as households benefit from strong real income growth amid falling inflation."

David Bharier, head of research at the British Chambers of Commerce, echoed how the spotlight should be on the bigger picture. “Growth of 0.7 per cent in the three months to April is positive news. Our own forecast, released last week, has upgraded growth expectations for 2024 to 0.8 per cent, rising to 1 per cent in 2025."

The latest GDP figures also come about a week before the Bank of England makes its next decision on interest rates, and experts have predicted that the monetary policy committee is unlikely to implement a cut without further progress on inflation and a cooling in the labour market. Rob Morgan, chief investment analyst at wealth-management firm Charles Stanley, said a strong first quarter of this year makes up for a mild recession in the second half of 2023, and he is among those that see “almost no chance of” an interest-rate cut before August.

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The EY Item Club says it thinks rising real household incomes and consumer confidence will be the key drivers of stronger economic growth in 2024 and into 2025 (file image). Picture: Jeff J Mitchell/Getty Images.

One key bellwether of the economy, the UK’s powerhouse services sector, saw output grow by 0.2 per cent in April, the fourth consecutive month of growth, while production’s equivalent fell by 0.9 per cent following growth of 0.2 per cent in March, and construction’s was down by 1.4 per cent, its third consecutive monthly fall.

And Bharier said: “Many businesses we speak to are still held back by skills shortages, high borrowing costs, and trade barriers with the EU. Sectoral performance remains very imbalanced.” He also flagged woes suffered by hospitality, and Dean Banks, the Scottish chef and entrepreneur behind restaurants including Dean Banks at the Pompadour and Dulse in Edinburgh, as well as Dune and Haar in St Andrews, has demanded that the next UK government must do more to support the sector.

Banks said: “An urgent review and action are needed, starting with a cut on VAT and cap on business rate increases for hospitality, so venues can get to grips with the rising costs of food and energy. A commitment to support for hospitality would be a welcome a first step, and relieve a massive amount of pressure the sector is currently facing. Across the UK are some of the world’s best restaurants, and we must create an environment that allows them to thrive, or we risk losing them.”

Mike Randall, chief executive at Simply Asset Finance, said: “The UK’s slow crawl toward economic recovery shines a spotlight on the challenges facing businesses up and down the country. With political parties setting out their stall in the lead-up to the election, far too little attention has been paid to what SMEs need to start, develop, and succeed."

Mike Randall, CEO of Simply Asset Finance, says: 'Far too little attention has been paid to what SMEs need to start, develop, and succeed.' Picture: contributed.

But there are also many forecasts of a positive economic environment that will buoy UK consumers, and after a report from PwC published in April found that almost a third of Scots described their finances as healthy, with money left for luxuries or saving.

Morgan commented: "Having battled the impact of stubborn inflation and high interest rates, many households are now starting to reap the benefits of inflation falling more rapidly than wage growth. Recent cuts to National Insurance and the increase in the National Living Wage also stand to offset the headwind of restrictive interest rates, and this could feed into consumption and wider activity."

Peter Arnold, UK chief economist at EY, said: “The EY Item Club thinks rising real household incomes and consumer confidence will be the key drivers of stronger economic growth over the rest of this year and into 2025. However, tighter fiscal policy and the lagged passthrough of past interest rate rises are likely to mean that the UK economy’s exit from its long period of stagnation will be steady rather than spectacular.”

Alco commenting was Danni Hewson, head of financial analysis at AJ Bell, who stated: “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 trick will be keeping the engine running smoothly, putting in the right kind of fuel and the right kind of investment, to get us out of neutral and into a much higher gear.”