The UK economy recorded a 0.1% monthly expansion in May. The data shows resilience in the face of soaring energy prices but also underscores the severe economic challenges awaiting incoming Prime Minister Andy Burnham.
Figures released on Thursday by the Office for National Statistics showed the small monthly increase was in line with economists' expectations. This follows a 0.1% contraction in April.
Over the three months to May, a less volatile quarterly measure, the economy grew by 0.7%. Growth for the three months to April was revised up to 0.8%.
This data arrives as Mr. Burnham prepares to succeed Sir Keir Starmer as Prime Minister next week, inheriting an environment of sluggish growth and strained public finances.
Paul Dales, Chief UK Economist at Capital Economics, stated that May's small gain was "not a terrible welcome gift" for the new leader, noting, "The UK economy has proven more resilient to the shock from the Iran conflict and higher energy prices than we initially expected."
He cautioned Mr. Burnham, however, against "getting too optimistic," adding that "inflation has not yet peaked, and the drag on real household incomes has not yet troughed."
Disruptions to shipping through the Strait of Hormuz early in the Middle East conflict triggered a sharp surge in global energy prices, forcing the Bank of England to abandon plans for interest rate cuts and dashing the Starmer government's hopes for a sustained economic recovery.
While international oil prices have retreated from an April peak of $126, they have surged again this month. Tensions between the US and Iran over control of the strategic strait risk escalating into a full-scale conflict.
Pricing in swap markets indicates traders now expect the Bank of England's Monetary Policy Committee to raise rates by 25 basis points to 4% by November. Prior to the recent rebound in oil prices, the market had priced in this hike for the first half of next year.
Following the GDP release, sterling was largely unchanged, trading at $1.353.
Martin Beck, Chief Economist at WPI Strategy, said the UK economy had "weathered the first-round effects of the Iran conflict better than many feared," and that the near-term outlook "looks less gloomy than it did a few weeks ago."
Growth in May was driven by the services sector, where output rose 0.3% month-on-month. Construction output fell 0.8%, while industrial production contracted by 0.5%.
Liz McKeown, Director of Economic Statistics at the ONS, noted services grew 0.7% in the three months to May overall, with particularly strong performances in computer programming and advertising.
A Treasury spokesperson said the government had left the UK economy "in a much stronger position than two years ago," and that the UK is on track to grow faster this year than other European members of the G7.
Ben Caswell, Senior Economist at the National Institute of Economic and Social Research, pointed out: "With volatile energy prices, heightened inflation risks, and fragile public finances, the new Prime Minister is inheriting a stagflationary environment with less than three years to turn around a dire economic situation."
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