The UK economy expanded by 0.4% in May, surpassing expectations and boosting the newly elected Labour government. The Office for National Statistics released flash figures on Thursday showing growth that exceeded the 0.2% monthly expansion forecast by a Reuters poll of economists. Following the announcement, the British pound jumped to a four-month high against the U.S. dollar, trading at $1.2863 by 8:30 a.m. in London.
According to LSEG data, this marks the currency’s highest level since March 8, 2024. The nation’s dominant services sector showed continued growth of 0.3% in May, while output in both production and construction rebounded from losses, rising by 0.2% and 1.9%, respectively. Prime Minister Keir Starmer will welcome this broad-based recovery as he begins his first week on the job.
Goldman Sachs positively adjusted its outlook for the U.K. following Labour’s decisive victory in the recent general election. The party campaigned on a platform focused on pro-growth initiatives, and its large parliamentary majority has led analysts to describe the new government as highly capable of enacting its agenda. Ashley Webb, U.K. economist at Capital Economics, noted the recent trend of increasing British GDP in recent months, excluding the stagnation in April, suggesting that the pressures from higher interest rates and inflation are starting to diminish.
Inflation in the U.K. has cooled from a 41-year high of 11.1% in October 2022 to more manageable levels by May this year.
UK economy sees growth in May
This performance has increased expectations for a potential interest rate cut from the Bank of England.
However, the BOE maintained its stance at its June meeting, even as the European Central Bank started reducing rates, citing persistent inflation concerns in the U.K.
Market opinions remain divided on the likelihood of a rate cut at the BOE’s August meeting. The new Finance Minister, Rachel Reeves, said that mortgage holders would welcome interest rate cuts after the economy returned to growth in May. She stated that she respected the Bank’s independence, “Of course, I know that many people who have been struggling with higher mortgage rates after the Conservatives’ mini-budget just under two years ago would welcome some relief with lower mortgage costs.”
It will now be up to the new government to sustain the momentum behind the latest economic growth figures.
Muniya Barua, deputy chief executive of industry campaign group BusinessLDN, emphasized the need for ministers to follow recent pro-growth announcements with high-impact, low-cost measures to unlock private investment. Suggested measures include overhauling the apprenticeship system and scrapping stamp duty on share transactions. Reeves recently announced intentions to introduce mandatory house-building targets, lift the ban on new onshore wind farms in England, and reform planning rules.
Additionally, on Wednesday, she launched a £7.3 billion ($9.4 billion) national wealth fund to attract private sector investment in U.K. infrastructure projects. The business community now awaits Labour’s first fiscal statement, expected no earlier than mid-September. Lindsay James, investment strategist at Quilter Investors, noted that this statement should clarify taxation and spending plans, allowing businesses to plan more effectively and potentially boosting investment.
However, this would take time to feed through, and until there is a better understanding of what is to come, we are unlikely to see any meaningful acceleration in GDP growth,” James added.
