UK GDP figures have been released this morning, confirming a 0.6% rise in Q1.

Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “Encouragingly, the UK’s economic growth seen so far this year is broad based across both manufacturing and services. Meanwhile, confidence among both businesses and consumers has grown. 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 planned increase in the National Living Wage also stand to offset the headwind of restrictive higher interest rates. This boost to spending power bodes well for some further modest growth in the coming months.

“Yet it’s still a lacklustre situation. Zooming out to the bigger picture, the economy is likely to continue to tread a steady but underwhelming path and requires productivity gains to set it on a steeper growth trajectory.

“It’s also unclear how much of the upturn in economic activity we have seen this year emanates from an expectation that interest rates will fall away relatively quickly. As those hopes have now been all but dashed the handbrake on confidence and growth may be reapplied.

What does it mean for interest rates?

“The small uptick in growth seen this year is neutral for interest rates. It will neither alarm the Bank of England that rates are too restrictive nor cause it concern that the economy is too hot and unduly stoking inflation. That probably means the Bank sitting tight in the short term.

“The first reduction in UK interest rates from 5.25% will probably occur in August and there could be one, maybe two, further cuts this year. This will be seen from the BoE’s point of view as moderately restrictive still, and an appropriate balance given the need to both ensure the downtrend in price rises continues and provide a platform to cut more quickly in the event of an economic slowdown.

“It is not yet clear the underlying causes of inflation are vanquished, especially given continued tightness in the labour market. As the year progresses favourable base effects will diminish, and we could even face a ‘second coming’ of inflation, especially if the US economy stays strong, which would serve to limit rate cuts there and cement dollar strength. The BoE can cut before the Fed, but it will be limited as to far it can go if the US doesn’t follow suit.

“The Bank will therefore want to see a more substantial cooling in wage increases, and in more sticky services inflation, before reducing rates. Although the economy is hardly rocketing it is strong enough to keep these things tight, helping maintain upward pressure on prices.”
George Lagarias, Chief Economist at Mazars comments: “The UK economy is rebounding, posting its best quarterly performance in over a year. The figure is largely due to services strength. Slowing inflation is once again empowering the British consumer. While a good GDP read will certainly cause some discussion within the BoE, we feel that it would probably not reduce the Bank’s determination to begin lowering rates in the next few months. We expect the road back to trend growth to be a slow and bumpy one, with twists and turns, but there’s no doubt that the British economy is mending.”

Leave a Reply