Economic outlook

Government spending boosts growth in Q2

Gross domestic product (GDP) grew by 0.6 percent in Q2 compared to Q1. This expansion was in line with the consensus expectation and followed the 0.7 percent increase seen in Q1. Compared to the same quarter a year earlier, the economy has grown by 0.9 percent, up from 0.3 percent in Q1.

The largest economic boost came from Government spending, which grew by 1.4 percent in Q2. Services output was up by 0.8 percent, while both production and construction sector output fell by 0.1 percent on the quarter.

Source: Office for National Statistics

Despite strong real, or inflation-adjusted, pay growth and improving consumer confidence, household spending grew by just 0.2 percent on the quarter.

The consensus forecast is for GDP to expand by 0.9 percent in 2024 and 1.3 percent in 2025. The Standard & Poor’s (S&P) Global UK Output Purchasing Managers’ Index (PMI) rose to 53.2 in August from 52.8 in July, signalling a solid upturn in private sector activity.

The index suggests an encouraging start to the second half of the year, with output, order books and employment all growing at faster rates amid rebounding business confidence, while price pressures have moderated.

Rise in inflation less than expected

Although the UK annual consumer price inflation (CPI) picked up for the first time this year from 2.0 percent in June to 2.2 percent in July, this was lower than the consensus of forecasts.

Importantly there were falls in both core CPI inflation (excluding food and energy) from 3.5 percent to 3.3 percent and services inflation from 5.7 percent in June to 5.2 percent. As services are labour-intensive, this is a good measure of domestically driven inflation and one that the Bank of England (BoE) monitors closely when setting monetary policy.

Source: Office for National Statistics

While both fell more than expected, they remain well above the Bank’s 2.0 percent inflation target.

Labour market data provides a mixed picture for the BoE

The unemployment rate fell to 4.2 percent in June, down from 4.4 percent in May. In the same period, regular pay growth fell from 5.8 percent in May to 5.4 percent in June.

While wage growth eased, there was stronger-than-expected employment growth as the unemployment rate fell. This combination will add to uncertainties about the degree to which domestic inflationary pressures may remain sticky.

Bank Rate cycle on the downside

The Bank Rate cut announced in August, the first since 2020, followed a narrow 5-4 vote by the BoE’s Monetary Policy Committee. Such a finely balanced decision means there is little consensus yet on the pace and likelihood of future cuts, with recent economic data complicating matters for the September vote. Markets are pricing in two further 0.25 percent cuts this year, but this is not a foregone conclusion if services or wage inflation remain high.