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UK economy shrinks by 0.1% in May after coronation festivities

13.07.23 13:27
Britain’s economy shrank by 0.1% in May after a hit to activity from a trio of bank holidays, including for King Charles’s coronation.

The Office for National Statistics said that gross domestic product (GDP) fell on the month, after growth of 0.2% in April, as manufacturing, energy generation and construction all dropped as some industries were affected by one fewer working day than normal. City economists had forecast a bigger fall of 0.3%.

While coronation festivities helped to provide a boost for some businesses, the UK’s pubs, bars, and restaurants suffered a fall in consumer spending after a strong April, while employment agencies also struggled amid a slowdown in hiring demand.

The arts, entertainment and recreation sectors benefited from the extra bank holiday, the ONS said.

The figures come as the Bank of England prepares to raise interest rates for a 14th consecutive time amid growing concern over high inflation, adding to pressure on households and businesses in a development expected to weigh on economic growth in the months ahead.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the latest figures were unlikely to give the central bank reason to pause.

“However, given the long time lag between rate rises and its effect on the real economy, tightening further risks damaging our growth prospects by overcorrecting for past errors,” he said.

“While the economy may rebound in June, the significant squeeze on activity from high inflation, stealth tax hikes and rising interest rates means the prime minister may struggle to meet his pledge to get the economy growing.”

Over the broader three-month period to the end of May, the economy showed no growth as activity in the UK’s dominant service sector flatlined. Construction rose by 0.2% while production – which includes manufacturing, energy production and mining – grew by 0.4%.

Rachel Reeves, the shadow chancellor, said: “Growth is down again, families are worse off and the impact of the Tory mortgage bombshell is reaching far and wide.

“This Tory government seems determined to march us down a path of low growth and economic insecurity.”

The chancellor, Jeremy Hunt, said the best way to get growth going again was to ease pressure on households by bringing down inflation. “While an extra bank holiday had an impact on growth in May, high inflation remains a drag anchor on economic growth,” he said.

Britain’s economy has broadly performed more strongly than expected in recent months, helped by falling global energy prices, rising consumer confidence and resilience in the jobs market.

Late last year, economists feared the UK would be in recession by now. The economy grew by 0.1% over the first quarter, matching the performance in the final three months of 2022.

A decline in activity in May had been widely anticipated because additional bank holidays typically lead to a drop in output, with the impact from one fewer day of work in offices, factories and in construction normally failing to offset a boost from leisure activities.

Paul Dales, the chief UK economist at the consultancy Capital Economics, said May’s performance had been better than expected. “Overall, the bank holiday and strikes make it hard to judge the true health of the economy. But our sense is that underlying activity is still growing, albeit at a snail’s pace,” Guardian reports.