The UK economy may have avoided recession, but its problems are far from over.
In a surprising development for analysts, the UK’s Gross Domestic Product expanded at its fastest pace in three years in the January-March period. This brings the United Kingdom out of the slight recession it had fallen into at the beginning of 2024.
GDP rose 0.6% on a quarter-to-quarter basis, compared to a 0.4% growth expected by Reuters-polled analysts. This was the fastest growth since Q4 2021 when the economy expanded by 1.5% on a rebound from the COVID-19 pandemic.
The UK’s economy expanded more than its peers, with the Eurozone growing by just 0.3% expansion and the US faring worse than expected at 0.4%. However, contrary to Europe and the United States, the UK is currently recovering from a slight recession.
In the last two quarters of 2023, the UK’s economy shrank by 0.1% and 0.3% respectively, bringing the country into a technical recession.
Prime Minister Rishi Sunak, who is facing general elections by January 2025, said the economy has “turned a corner”. A similar optimistic message was launched by Finance Minister Jeremy Hunt. "There is no doubt it has been a difficult few years,” Hunt said, “but today’s growth figures are proof that the economy is returning to full health for the first time since the pandemic."
Interest rate uncertainty
Friday’s GDP reading likely came as a surprise for the Bank of England, which was preparing for an interest rate cut in the following months.
After the COVID pandemic and the Russian invasion of Ukraine, the UK was hit by the worst inflation wave among G7 members. To battle rising prices, the BoE brought interest rates to a 20-year high at 5.25%.
Later last year, inflation started falling at a stable pace, setting the stage for rate cuts in 2024. This notion was enhanced by the weak GDP performance in Q3 and Q4 last year.
The latest GDP rise, combined with a weaker-than-expected fall in inflation in March, could delay cuts further in the year. "The Bank of England doesn’t need to rush to cut interest rates", Ruth Gregory, deputy chief UK economist at Capital Economics, said.
The Labour Party contested Rishi Sunak’s optimism, saying the GDP rise yielded little to no effects on the UK citizens’ quality of life. "This is no time for Conservative ministers to be doing a victory lap and telling the British people that they have never had it so good," said shadow finance minister Rachel Reeves.
Polls show the Labour Party is going to win the next election by a landslide. The Conservative Party has been in power since 2010.
