UK Economy Narrowly Avoids Contraction in May, but Challenges Persist

Despite a bank holiday to mark the coronation of King Charles and strikes, the economy shrank by only 0.1% in May, compared to the expectations of a 0.3% contraction.

This suggests that the widely forecasted recession, which was anticipated due to high inflation and surging interest rates, has not yet begun.

All sectors of the economy, with the exception of services, which showed no growth, contracted in May.

The pound rose modestly against the dollar on the back of the data.

However, business groups cautioned that the big picture of a tepid economy remains, with stubborn inflationary pressures that are likely to result in further interest rate hikes by the Bank of England in early August.

"Our sense is that underlying activity is still growing, albeit at a snail's pace," said Paul Dales, chief UK economist with Capital Economics.

The economy is on track to expand by around 0.1% in the second quarter, a touch stronger than the BoE's forecast of no change, but is likely to suffer a mild recession later in the year.

Finance Minister Jeremy Hunt acknowledged that high inflation continues to hamper the economy and called for patience in bringing it down.

"Our plan will work, but we must stick to it," he said.

The ONS data also showed that the trade-in-goods deficit widened by more than expected to £18.7 billion in May, with exports to the European Union falling to their lowest level since January 2022.

Despite the challenges, there were some bright spots in the economy, with companies in the arts, entertainment, and recreation sector benefiting from the extra bank holiday, as well as hotels and restaurants.

However, strikes in the health, rail, and education sectors dragged on output.

The ONS will release data on the second quarter's economic performance in July, which will provide a clearer picture of the state of the British economy.