After a surprising blip into negative growth of -0.1% in May, the UK economy saw a strong recovery in June with the economy expanding by +0.4%. Now, with the economy emerging from a recessionary fog, new ideas and innovation are popping up left and right. It “took a breather in the second quarter,” said George Brown, senior economist at Schroders. Bank of England (BOE) sees optimistic signs but remains vigilant. They cite persistent domestic and geopolitical risks that continue to rattle economic activity.
In a surprise decision at its last monetary policy meeting, the BOE took a daring step and lowered interest rates by 25 basis points. This decision is meant to promote growth even as inflationary pressures persist. The central bank noted, “We remain focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term.”
In June, services overwhelmingly led growth. This was particularly the case in industries such as research and development in the physical, engineering, and life sciences, as well as automobile dealerships. The BOE acknowledged these trends but pointed out that underlying UK GDP growth “has remained subdued, consistent with a continued, gradual loosening in the labour market.”
This strong quarterly growth was powered by some better-than-expected source data in April, which outpaced original estimates. Economists are very circumspect about carrying this energy into the third quarter. Ruth Gregory, deputy chief UK economist at Capital Economics, remarked on the uncertainty surrounding future growth: “The weak global economy will remain a drag on UK GDP growth for a while yet. That’s because the full drag on business investment from April’s tax rises has not yet been felt.
Analysts pointed to reduced trade policy uncertainty after the conclusion of a bilateral trade deal with the U.S. The removal of the baseline 10% tariff on UK exports to the U.S. had eased many fears over the state of unreconciled trade relations.
While the June reports showed encouraging trends, the BOE’s short-term economic outlook report urged caution when interpreting indicators of potential economic recovery. Liz McKeown, an economist at the BOE, stated, “The economy was weak across April and May, with some activity having been brought forward to February and March ahead of Stamp Duty and tariff changes, but then recovered strongly in June.”
Moreover, Andrew Bailey of the BOE pointed out potential inflationary risks, saying, “There’s an upside risk to inflation, and particularly as to whether… this current increase could persist somewhat more than we expect it to. We don’t expect it to actually, but could it?” He added that these alarming economic conditions should all be considered against the backdrop of a deteriorating labor market.
As policymakers figure out their way through these appeals, UK chancellor Rachel Reeves recognized the discordant notes from recent data. She stated, “The latest data was positive but there is more to do to deliver an economy that works for working people.” Reeves emphasized that despite the economic challenges, the UK still possesses the core ingredients needed to thrive economically. He thinks it’s been “stuck too long.”
Sharon Graham, a representative for workers, echoed concerns about investment in public services and industry: “Workers can’t wait forever for investment in our public services and industry.” This sentiment is representative of a larger concern, the fear that we cannot guarantee that our economic growth will convert to noticeable benefits to the everyday American.
As the UK charts a new course beyond the pandemic, it is presented with opportunities as well as considerable challenges. And though June’s promising growth figures offer optimism for a potential rebound, the long-term economic picture is still precarious. The BOE’s cautious approach underscores the need for careful monitoring of both domestic and international factors that could impact future growth trajectories.