Earlier this morning, the latest UK GDP (Gross Domestic Product) numbers hit the wires and were broadly stronger across all key metrics. This was bolstered by expansion in the services sector, which consequently underpinned a bid in GBP versus G10 peers. Sterling continues to largely outperform, as of writing, particularly against the Norwegian krone (NOK), the Canadian dollar (CAD), and the Swiss franc (CHF).

According to the Office for National Statistics (ONS), economic activity expanded by +0.4% between April and May, bettering Bloomberg’s median estimate of +0.2% and up from a month of no growth in April. This reflects the economic recovery in the UK following stagnation over the last few years and positions the UK economy for solid growth in Q2.

For May, output expanded by +1.4% year over year, up from April’s reading of +0.6% and north of economists’ estimates of +1.2%. We also saw economic activity expand in the three months to May, rising +0.9% – its strongest pace of growth since early 2022. The print also exceeded expectations and the previous value of +0.7%.

On the services front, which accounts for the majority of output and jobs in the UK, output rose by +0.3% in May from an upwardly revised print of +0.3% in April. Year-on-year figures show a rise of +1.6% in May, up from +1.1% in April.

As shown below, the service sector contributed the largest share of GDP growth in May, followed by construction and production.

Source: ONS

The latest GDP growth numbers will be a welcome sight for the new Labour government and, in particular, the new Chancellor of the Exchequer, Rachel Reeves. You may recall that in her first public speech, Reeves highlighted that economic growth was a ‘natural mission’ for the Labour government. You may also note that only last month, the new Prime Minister, Sir Keir Starmer, was targeting annual GDP growth of +2.5%. Of note, the OBR forecasts annual growth of +1.9% by 2025.

August Rate Cut?

Despite Consumer Price Index (CPI) inflation recently shaking hands with the Bank of England’s (BoE) forecast of +2.0%, the rise in economic activity – specifically in the services sector – signals a possible acceleration in CPI inflation, thus decreasing the odds of a rate cut.

Markets subsequently dialled back their expectations of a rate cut, with August’s policy meeting now a coin toss. Before the release, the OIS curve forecasted approximately a 60% probability that the central bank would begin easing policy.

In addition, while the BoE Chief Economist recently said that reducing the Bank Rate is a ‘question of when, not if’, hopes were somewhat dashed for an August cut following Pill’s comment on inflation remaining uncomfortably high.

This also follows a speech from Jonathan Haskel, an external Monetary Policy Committee (MPC) member, who made the airwaves after commenting that he ‘would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably’.

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