UK growth – OK, all things considered

UK growth – OK, all things considered

For all that’s been thrown, the UK economy has not done too badly so far this year.

• Despite the pall cast by last October’s tax-raising budget and low levels of business optimism, growth roared back in the first quarter, exiting a period of stagnation, with GDP up a hefty 0.7%. At least for the first quarter the government can claim it has met its manifesto pledge to make the UK the fastest-growing economy in the G7. (It is worth noting that Germany, long Europe’s growth laggard, also posted unexpectedly strong growth in the first quarter.)  

• This, of course, precedes sweeping US tariffs and the ensuing surge in uncertainty that was seen in early April. Last week the OECD followed the IMF and downgraded its forecasts for global growth for this year and next, citing a significant increase in trade barriers and rising uncertainty. Unease is apparent in financial markets with the US dollar down 6% so far this year on a trade-weighted basis and the cost of 30-year borrowing for the US government reaching a 16-year high in late May. Global equity markets, however, have been cheered by a partial retreat on tariffs by the US administration and have more than regained the losses made on the back of Donald Trump’s initial tariff announcement.

• We will learn more about the immediate effects of the tariff announcement when estimates for UK GDP in April are published this Thursday. Perhaps surprisingly, most UK activity data released since Mr Trump’s “liberation day” announcement have come in on the strong side of expectations with retail spending showing a particularly marked pick up in recent months. 

• Our hunch is that, despite the headwinds, we will see continued, if unspectacular, growth in the UK through the rest of this year. A number of factors should help.

• First, although the chancellor announced a large increase in taxes last October, she announced an even greater increase in spending – an average of £72bn a year for the next five years. The Office for Budget Responsibility forecasts that government consumption spending will rise by 3.7% over the course of this year, much faster than the economy as a whole or consumer spending.

• Second, consumer incomes are showing good growth, with earnings likely to outpace inflation through this year.

• Third, the UK’s framework trade agreement with the US, though not yet in force and hazy in part, should help ease trade uncertainty.

• Fourth, interest rates are heading down. The Bank of England has cut interest rates twice since January and seems likely to do so at least once more this year. Lower rates boost the finances of businesses and households that have borrowed on floating rates. Many households rolling off two-year fixed mortgage deals are now seeing a fall in repayments though those with longer-term fixed deals face higher mortgage repayments. Still, UK consumers are being unusually thrifty at the moment possibly because they are preparing for higher mortgage payments or are overpaying their mortgage. On past form lower interest rates are likely to lead to a fall in today’s high savings rate, so providing a fillip to consumer spending power.

• The UK isn’t out of the woods and the outlook is, at best, for lacklustre growth through the rest of this year. Still, that’s better than things looked a couple of months ago.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.8% at 8,838. The US dollar neared a three-year low over investor fears of US public debt sustainability.

Economics

• The OECD cut its global growth forecast to 2.9% this year, the lowest annual growth rate since the COVID pandemic
• Rapid reshoring of supply chains, due to a more uncertain geopolitical climate, could reduce global GDP by more than 5%, according to the OECD
• US president Donald Trump and Chinese president Xi Jinping announced high-level trade talks following both sides previously accusing the other of breaching the recently agreed trade pact 
• The US increased tariffs on imports of steel and aluminium from 25% to 50%. The UK was granted an exemption from the hike while trade talks continue
• The US government’s proposed tax and spending bill will add an extra $2.4tn to public debt by 2034, according to the Congressional Budget Office
• Large investors are reportedly reducing their exposure to US equity markets over fears of US public debt levels and trade uncertainty, the FT reports 
• Fossil fuel investment is expected to fall this year for the first time since the COVID pandemic, primarily due to low oil prices, according to the International Energy Agency
• The private credit market could become a “locus of contagion” in future financial crises due to its rising prominence and integration with existing financial market infrastructure, according to a report by Moody’s Analytics
• Mr Trump called for the US Federal Reserve to reduce interest rates by a full 1% following the labour market data release
• The UK government released its strategic defence review that recommended almost £68bn of investment to modernise the UK’s military, including building 12 new submarines and investing in new nuclear warheads
• UK chancellor Rachel Reeves announced £15bn for transport projects across England ahead of the government’s comprehensive spending review later this week. The Institute for Fiscal Studies said that sharp trade-offs in government spending would be “unavoidable”
• UK civil servants could save up to two weeks of working time a year using AI for administrative tasks, according to a new government study
• UK house prices increased by a more-than-expected 0.5% in May, compared with the previous month, according to Nationwide
• Euro area inflation softened to 1.9% in the year to May, below the ECB’s 2% target for the first time since September last year
• The European Central Bank cut interest rates to 2%. ECB president Christine Lagarde said the ECB’s rate-cutting cycle has “nearly concluded”
• The German government announced plans for corporate tax breaks worth €46bn as part of attempts to revive economic growth
• The European Commission announced that Bulgaria is ready to join the euro area in 2026, following previous delays due to inflation being above required levels and political uncertainty
• Japan recorded 686,000 births in 2024, the lowest since records began in 1899, as concerns continue to grow over the country’s ageing population
• Global trade uncertainty will be a greater challenge for central banks of emerging market economies than the COVID pandemic, according to IMF’s first deputy managing director Gita Gopinath, due to the unpredictable nature of tariffs and differing effects across countries

Business

• Elon Musk, former head of the US Department of Government Efficiency, called Mr Trump’s proposed tax and spending package a “disgusting abomination” and called for Mr Trump to be impeached. Mr Trump responded by threatening to cut government subsidies and contracts going to Mr Musk’s companies. Tesla’s share price fell sharply on the news
• A US judge has temporarily blocked the US government’s ban on Harvard University accepting international students
• The UK government said that it plans to reverse cuts to the winter fuel payments for some pensioners and announced that 500,000 more children would be eligible to receive free school meals from September next year
• Private equity company KKR pulled out of plans to acquire troubled UK utilities company Thames Water
• UK fintech company Wise will switch its primary listing from London to New York to boost its valuation and attract investment. The decision increases concerns over the appeal of UK equity markets
• The UK government is planning to fast-track plans to redraw flight paths over London, in an attempt to increase flight numbers at the city’s airports, improve efficiency and reduce pollution
• The European Commission approved a joint venture between companies across the UK, Italy and Japan to produce the next generation of fighter jets
• Meta said it plans to let brands use artificial intelligence to fully create online advertisements and target customers from next year, The Wall Street Journal reports, the latest demonstration of growing AI adoption 

Global and political developments

• Russia struck targets in Ukraine with missiles and drones in a significant attack following Ukraine’s recent drone attacks on airfields far from the front lines
• Mr Trump said his recent conversation with Russian president Vladimir Putin was not one “that will lead to immediate peace”
• Israel said it will respond to recent missile attacks launched from Syria towards Israel
• Mr Trump announced plans to ban citizens of 12 countries, including Afghanistan, Iran, Libya and Yemen, from entering the US, citing national security concerns
• Mr Trump said Iran must end its uranium enrichment programme as part of its proposed deal with the US. This contrasts to official proposals sent to Iran that allow for low levels of enrichment, the FT reports. Iran’s leader Ayatollah Ali Khamenei responded by saying the US leaders were “impolite and rude”
• The US Department of Justice charged two Chinese nationals for attempting to smuggle a “potential agroterrorism weapon” to the US and research it in a college laboratory
• Karol Nawrocki, a member of the Eurosceptic opposition party Law and Justice, won the Polish presidential election. His appointment is likely to frustrate the government of centrist prime minister Donald Tusk in its attempts to strengthen the rule of law
• South Korea’s newly elected president, Lee Jae-myung, said his country faces “a tangled web of overlapping crises” following recent political turmoil and higher global economic uncertainty 

And finally… a lorry transporting over 31,000kg of bee hives overturned in the US state of Washington last week, releasing approximately 14m bees onto the road. Authorities warned people to avoid the area while a community of beekeepers helped with the rescue efforts – sting operation