Recession rebound: Why the UK economy is growing more strongly than first thought and its future prospects

Releasing revised figures for the first quarter of this year, the Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.7 per cent between January and March. That’s up from the 0.6 per cent figure flagged in May. The improvement in growth was underpinned by the services sector, with slightly stronger activity in the professional services, transport and storage sectors.

This growth saw the UK economy rebound from a recession in the second half of 2023, after the ONS previously confirmed two consecutive quarters of decline - the definition of a technical recession. The economy shrank by 0.1 per cent in the third quarter of last year, and 0.3 per cent in the fourth quarter.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said the rebound was likely to continue through the rest of 2024. He noted: “All the data suggests that the economy is set to continue to rise in Q2 [ second quarter]. We then expect growth to accelerate in the second half of this year and into 2025 as sharply lower inflation, tax cuts and falling interest rates give households an income boost.

“The big unknown is how much of this rise in incomes households will actually spend. Indeed, despite real households' disposable income growing by 0.7 per cent in Q4 [2023] and consumer confidence increasing, the household saving ratio rose to 11.1 per cent in the latest quarter, up from 10.2 per cent in Q4, suggesting that households were still rebuilding saving buffers at the end of last year.”

The latest ONS data showed that the services industry expanded by 0.8 per cent over the first quarter, up from a previous estimate of 0.6 per cent. Meanwhile, the production sector grew by 0.6 per cent and construction declined by 0.6 per cent for the period. The overall quarterly growth was the strongest the UK has witnessed since the end of 2021.

Sophie Lund-Yates, lead equity analyst at investment platform Hargreaves Lansdown, said: “While hotter-than-expected growth doesn’t help those looking for a faster route to cutting interest rates, it does help to boost overall optimism. An interesting component of the top-line GDP number was a 0.4 per cent increase in real household expenditure over the first quarter. That’s a stark increase from previous declines. It shows improved spending on recreation and culture, and includes stronger spending on things including housing and non-alcoholic drinks.”

Lindsay James, investment strategist at Quilter Investors, added: “With the wet spring that has firmly held back the retail sector finally giving way to warmer weather and interest rates likely to be heading down by year end, it could well be that better growth lies ahead. However, until the next Budget makes both taxation and spending plans clear, businesses are unlikely to invest at scale, delaying any meaningful acceleration in GDP growth yet further.”

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