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UK economy returns to growth driven by consumer spending

The UK economy returned to growth in April, driven by the rebound in consumer spending and fewer strikes, but the prospect of higher interest rates clouds the outlook.

Gross domestic product grew 0.2 per cent between March and April, reversing some of the contraction of the previous month, according to data published by the Office for National Statistics on Wednesday.

The figure was in line with analysts’ expectations and was driven by the services sector, which expanded 0.3 per cent.

The expansion “will further raise hopes that the economy will escape a recession this year”, said Ruth Gregory, economist at the consultancy Capital Economics. However, she added that with the “full drag from high interest rates yet to be felt, it is too soon to sound the all-clear”.

Interest rates have risen from a record low of 0.1 per cent in November 2021 to the current 4.5 per cent. The strong labour market and the resilience of the economy support market expectations that the Bank of England will continue raising rates in the months ahead to bring inflation down to its 2 per cent target.

Neil Birrell, chief investment officer at Premier Miton Investors, warned that with “such robust data across large parts of the economy and inflation staying stubbornly high, interest rates can only be going higher”.

Chancellor Jeremy Hunt said: “High growth needs low inflation, so we must stick relentlessly to our plan to halve the rate this year to protect family budgets.”

The outlook for the UK economy has improved during the past few months, largely reflecting the fall in wholesale gas prices from their peak in the summer. Earlier this month, the OECD upgraded its forecast for the UK economy and no longer expected an economic contraction this year, following similar upgrades by the IMF and the Bank of England.

GDP for April “bounced back after a weak March”, said Darren Morgan, ONS director of economic statistics. “Bars and pubs had a comparatively strong April, while car sales rebounded and education partially recovered from the effect of the previous month’s strikes,” he added.

The ONS reported that output in consumer-facing services, such as stores and restaurants, grew 1 per cent in April, following a fall of 0.8 per cent in the previous month. But the sector was still 8.7 per cent below its level in February 2020, before the pandemic, reflecting the impact of high inflation on household finances.

Growth in those sectors was partially offset by falls in health, which was affected by the junior doctors’ strikes, along with falls in computer manufacturing and the often erratic pharmaceuticals industry.

Housebuilders and estate agents also had a poor month, with construction posting a 0.6 per contraction.

In the three months to April, a less volatile measure of the trend, the economy was little changed from the previous three months, up only 0.1 per cent. Output is still lower than at its recent peak reached in May and it is only 0.3 per cent up from its pre-pandemic levels.

“GDP still is oscillating around a broadly flat trend,” commented Samuel Tombs, economist at the consultancy Pantheon Macroeconomics.

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