The U.K. economy expanded faster than anticipated in May, giving Prime Minister Keir Starmer's new administration some impetus but also raising questions about the likelihood of a Bank of England (BoE) interest rate cut next month.
Economic output increased by 0.4% in May, after a 0.2% rise in April, Britain's Office for National Statistics (ONS) said Thursday. A Reuters poll of economists had pointed to another 0.2% monthly increase.
The strength of the upturn added to doubts that the BoE will begin cutting interest rates on Aug. 1. Three policymakers this week emphasized the strength of domestic price pressures.
The chance of a rate cut in three weeks' time edged below 50% in early trade on the futures markets on Thursday from just above 50% on Wednesday.
May saw a broad-based increase in economic output, with the services, manufacturing, and construction industries all growing, and the latter grew by 1.9% in the month, driven by house-building.
The figures represented an early boost for the new Labour administration, which has set itself the aim of achieving the fastest growth among the Group of Seven advanced economies on a sustained basis.
"The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate," Ashley Webb, an economist with consultancy Capital Economics, said.
Over the three months to May, the economy expanded by 0.9%, the strongest reading since the three months to January 2022, compared with the consensus forecast for a 0.7% expansion.
Last month, the Bank of England said it expected the economy to grow by 0.5% over the second quarter – something that now looks likely to prove too low.
"These gross domestic product (GDP) figures may make an August rate cut less likely by providing those rate-setters who are concerned about underlying price pressures with sufficient confidence about the U.K.'s economic recovery to continue putting off loosening policy," Suren Thiru, economics director at accountancy body ICAEW, said.