UK economy growing twice as fast as expected: what this means for your finances

Britain’s economy grew twice as fast as expected in May but the feel-good factor may not extend to millions of mortgage holders and small businesses hoping for an imminent cut in interest rates.

The latest official data showed that UK gross domestic product (GDP) - a broad measure of economic output - increased by 0.4 per cent in May, twice the rate that economists had been predicting and as more shoppers returned to high streets and construction work recovered. It came after no growth was recorded in April when damp weather hit consumer spending.

The stronger-than-expected performance in May puts the UK economy on track to surpass the Bank of England’s projection of 0.5 per cent GDP growth for the second quarter, barring a notable decline in June. It would represent an early boost for the new Labour government, which is looking for economic growth and thus higher tax revenues to help fund its spending plans.

Britain's retailers had a decent May, reporting a 2.9 per cent increase in trade as they rebounded from a 1.8 per cent decline the previous month in the face of poor weather.

However, the robust growth could also lead to disappointment for mortgage payers, businesses and borrowers eyeing a cut in interest rates as early as 1 August, when the central bank’s rate-setting monetary policy committee is due to meet next. Specific business sectors such as housebuilding and hospitality have been hammered by high interest rates and their negative impact on buyer confidence and consumer spending.

Kevin Brown, savings specialist at Scottish Friendly, said: “A rise in the GDP figures for May is a welcome surprise at an uncertain moment for the economy. However, stronger than anticipated economic growth will give the Bank of England pause for thought on where next for rates.

“Although inflation is more or less back at target, GDP growth will signal to the bank that the economy is tolerating higher rates. This therefore diminishes the impetus to begin making cuts and won’t be what mortgage holders want to hear. This suggests that the timing of rate cuts could beat a further retreat from here, despite August expectations of a cut.”

Suren Thiru, economics director at accountancy body ICAEW, suggested that the GDP uptick in May could have been followed by a “June washout”, with wet weather likely to have stifled output from key sectors of the economy, despite a helping hand to hospitality and some retailers from the Euro football championship.

Savers have been urged to take advantage of savings rates that have been creeping higher.

He added: “These GDP figures may make an August rate cut less likely by providing those rate setters, who are concerned about underlying price pressures, with sufficient confidence about the UK’s economic recovery to continue putting off loosening policy.”

The GDP figures come after a 0.6 per cent increase across the first quarter of 2024, having rebounded from a shallow technical recession in the latter half of 2023. The Office for National Statistics’ director of economic statistics, Liz McKeown, said the economy grew strongly in May, with all the main sectors registering increases.

“Many retailers and wholesalers had a good month, with both [sectors] bouncing back from a weak April,” she noted. “Construction grew at its fastest rate in almost a year after recent weakness, with housebuilding and infrastructure projects boosting the industry.”

The services sector remained a key driver for economic growth across the UK, with its fifth consecutive monthly increase. Retailers had a particularly strong month, reporting a 2.9 per cent increase in trade for May as they rebounded from a 1.8 per cent decline the previous month in the face of poor weather.

Elsewhere, the construction industry saw output grow by 1.9 per cent, with an increase in both new work and maintenance. Despite the rebound, the sector still contracted over the three months to May as it continues to face pressure from high interest rates.

Next Wednesday, July 17, will see the publication of inflation figures for June. They are expected to show the annual headline rate holding steady at about 2 per cent - the Bank of England’s target level - though a slight creeping up of prices is expected towards the end of the year.

Mark Hicks, head of active savings at investment platform Hargreaves Lansdown, said it was a “perfect scenario for savers at the moment” with inflation easing back and savings rates treading higher in recent weeks.

He noted: “Both easy access rates and fixed terms have started to creep up in July, driven by intense competition at the top of the market which savers should be taking full advantage of. This means savers are consistently getting above double the rate of inflation returns, which increases the attractiveness of holding cash in your portfolio.

“As we get closer to the timing of the first few rate cuts, the market may swiftly get ahead of itself, and any inflation print below expectations will fuel that trend.”

Business leaders warned that growth remained precarious despite the stronger-than-expected GDP recovery. The Institute of Directors (IoD) said its members had been cautious on the outlook for the year ahead in the run-up to the general election, with its data showing a drop-off in confidence, investment and hiring intentions.

Anna Leach, chief economist at the IoD added: “Growth is expected to be supported this year by improving real incomes and a strong labour market, with lower interest rates further out likely to support lending and business investment. But stepping out of the minutiae of GDP data, the UK’s growth remains precarious.

“The new government’s commitment to delivering growth is heartening, and their early steps to deliver on that commitment are encouraging,” she added.

UK inflation milestone: Why prices are cooling and when interest rates will be cut