91探花

Growth surged in the first half of 2024, marking a rapid recovery from the recession in the second half of last year. The economy was 1.5% bigger in June than December. Admittedly, at 0.6% a quarter, this pace of growth is significantly above the UKs pretty meagre trend rate of about 0.3% a quarter, which might worry the Monetary Policy Committee (MPC) that inflation pressure will rebound. But with the economy starting the year with plenty of spare capacity, a couple of quarters of above trend growth won’t be enough to risk the economy overheating and shouldn’t concern the MPC. 

We think the UK economy has now firmly exited the stagnation phase of the last four years and will continue to grow solidly over the rest of 2024 and into 2025 as real incomes rise, consumer and business confidence improves, and interest rates fall further. 

Behind the data 

Growth was flat in June as it was hampered by bad weather and election uncertainty, which caused the services sector to drop by 0.1% month-on-month (m/m). Services output was dragged down by June’s 1.2% month-to-month fall in retail sales, which combined with the rest of the wholesale and retail sector sliced 10 basis points (bp) off month-to-month GDP growth. Junior doctors’ strikes from June 27 to July 2 hit healthcare output, chopping another 7bp off GDP growth. Accommodation and food services output surprisingly fell 1.0% month-to-month defying more positive business services.

However, the manufacturing sector continued to rebound, growing by 1.1% m/m and the construction sector managed to eke out a 0.5% gain despite the bad weather. 

And while the headline quarterly number of a 0.6% rise for GDP is impressive, the underlying numbers are a little more concerning. Consumer spending only grew by 0.2% quarter-on-quarter (q/q) and business investment dropped by 0.1% q/q, leaving big growth in government spending of 1.4% q/q to do most of the heavy lifting. 

The UK GDP outlook

While a rebound in activity is likely in July, we expect the quarterly pace of growth to slow in the second half of the year — the surge in investment that supported growth in Q1 24 looks like it was a one-off, while the government spending boost in Q2 24 is unlikely to be sustained.

We expect consumer spending to pick up over the rest of the year, though, as rising real incomes, improving confidence and lower tax and interest rates feed through into final spending. Similarly, the sharp rise in business confidence over the last few months, combined with lower interest rates should spur a revival in business investment. 

There’s little reason to think the Q2 24 GDP data will stop the Bank of England (BoE) from easing again before the end of 2024, but it will want to see signs that growth is slowing in the second half of the year. Like us, it expects growth to slow to 0.4% in Q3 24. 

In its August forecast, the BoE suggested that one of the key risks to the outlook was that growth could be faster than it expected, meaning domestically generated inflation is stickier in the medium term.

That’s a big reason why we expect it to be cautious about how quickly it eases policy over the remainder of this year and into 2025. We see one more cut in 2024 - in November - and four in 2025.

Overall, the UK economy has shown a solid performance in the first half of the year, but we need to see signs of rising incomes and confidence feeding though into actual spending and investment to drive growth over the next year. 

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