UK economy shrinks by 0.1% in May raising chances of further interest rate hikes: reaction

by | Jul 13, 2023

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News released by the Office for National Statistics (ONS) today has shown that UK GDP shrank by 0.1% in May 2023.

It follows growth of 0.2% in April. The latest data adds to worries for mortgage rates and for the cost of living crisis, as it makes it more likely that the Bank of England will need to hike base rates further in order to bring inflation under control. 

Investment and market experts have been sharing their views about what lies ahead for the UK economy as follows:

 
 

Dr Ventsislav Ivanov, economics expert and lecturer at Oxford Business College, commented: “These latest figures show the UK economy is flatlining, and the prospects for the short-term health of this particular patient don’t look encouraging.

“Growth in the services sector that’s the beating heart of the economy slowed to a standstill in May, and signs of life over the quarter were non-existent.

“The arrival of an additional Bank Holiday in May didn’t help the manufacturing and construction sectors, but it would be a mistake to place all the blame on King Charles’ big day.

 

“Rocketing interest rates are hurting businesses as much as individuals, and bosses are trapped between soaring prices and workers’ demands for pay rises.

“We should expect to see redundancies rise still further as companies are forced to live within their means, and growth will remain sluggish for the short to medium term.

“With signs that inflation is becoming embedded, it’s becoming increasingly clear that politicians trying to resurrect the economy have no miracle cure.”

 

Richard Carter, head of fixed interest research at Quilter Cheviot: “As the government and Bank of England scramble to bring inflation down, there are signs that the large price rises and increase in interest rates are starting to bite on the economy as growth fell over the month and flatlined over the last quarter. The UK economy has done well to avoid a recession to date, but how long this can continue when rates are expected to reach 6% and beyond remains to be seen. Indeed, you just have to look at the data from the Bank of England’s recent stress test on the UK banking system to see that there are skeletons lurking in the closet when it comes to mortgage risk and people rolling onto much higher rates. 

“Furthermore, while the labour market remains very tight, it is beginning to show signs of weakening and may start to roll over soon, exposing the economy to both a weaker consumer and corporates beginning to struggle. The savings accumulated during the pandemic cannot be relied on for much longer and the effects of inflation and interest rate rises to date will ultimately have sucked a huge amount of money out of the economy.”

“That said, unless economic growth turns persistently negative or we see a dramatic sudden drop, the BoE will press on with the rate rises. But, rate rises have a lag between action and reaction so we are really only seeing the first hikes really taking effect. This puts the BoE in an incredibly difficult position as it could very easily overtighten and make the economic situation worse. As a result, it will want to see inflation coming down and quickly so it can ease the pressure on the economy and begin the long journey back to more normal, palatable rates.”

 

Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services: “The reduction in the monthly GDP figures revealed today is cause for concern but not yet panic stations, given the fall in economic activity can be ascribed almost directly to fewer working days in May due to the King’s Coronation.  

“The data we saw after June and September of last year show the impact extra bank holidays can have on economic activity, something which is particularly evident this May in the subdued manufacturing, construction, and service sector output.  

“This weakness in May should be understood as a one-off, and a reversal can be expected in next month’s data. However, it is yet to be seen whether this will be sufficient to deliver growth over Q2 as a whole – the expectation is it will, but only just. Most concerning are the declining figures in manufacturing and industry, which demonstrate an ongoing weakness in overall domestic activity and overseas demand for UK exports.  

 

“This subdued economic performance is unlikely to sway the Bank of England’s interest rate-setters from a further interest rate hike in early August, however. Unless there is an improvement in productivity an economic contraction is likely, though it should be far shallower than the one experienced during the pandemic.”

Derrick Dunne, CEO of YOU Asset Management, commented: “Concerns over the state of the economy have heightened with the ONS reporting flat GDP growth during the second quarter, and a 0.1% fall for the month of May. 

“The Bank of England has warned that while the economy has proven resilient enough to withstand constant rate rises till now, we have not yet seen the complete effects of hikes seep through to GDP figures. This means things will get worse before they get better.

 

“Inflation remains persistently high, and after the wage growth data released earlier in the week, it would be no surprise to see the Bank hike rates even further. 

“The economy has notably been reliant on the services sector to pull itself up previously, but has seen no positive growth this month. With the employment rate still lower than pre-pandemic levels, it makes it even more crucial for the Government to encourage people to return to work and lift the economy.

“Time will tell if we will face a recession, but in the meantime, investors should focus on their broader, long-term goals and maintain a resilient and diversified portfolio to withstand ongoing market volatility.”

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