Crisis, what crisis? Stagflation, what stagflation? At first glance, the solid uptick in UK economic activity in May suggests that the outlook is not as bad as previously feared.
Without a doubt, the monthly growth estimate from the Office for National Statistics came as a surprise to financial markets – and for once an upside surprise.
The city expected gross domestic product to rise 0.1% instead of the actual 0.5% increase. April’s decline was also smaller than initially thought – 0.2% instead of 0.3%.
Even so, a look under the hood of the economy shows evidence of the strains caused by rising inflation, particularly in the services sector – which accounts for around 80% of GDP.
The ONS divides services into two main categories: consumer-facing services, which include spending on the high street, in restaurants and hotels and travel; and non-consumer services, which include categories such as health, education, banking and insurance.
Overall, service sector output rose 0.4% in May – largely due to an increase in GP appointments – and was the main contributor to the growth in l ‘economy. Consumer services, however, fell 0.1%. There was a 0.5% drop in retail trade and a 5.3% drop in sports, recreation and amusement.
It wasn’t all bad news. As the scenes of disruption at UK airports showed, many people are looking to go on holiday abroad, resulting in an 11% increase for travel agencies and tour operators.
So far at least, the GDP data suggests that many consumers are deciding what matters to them rather than stopping spending altogether. The odds of the Bank of England raising interest rates by 0.5 percentage points from 0.25 points in August have likely increased.
May is only a month away and there is likely to be a sharp contraction in June due to the impact of the extra bank holiday to mark the Queen’s Platinum Jubilee. Rising inflation will also intensify the pressure on living standards and there is still the possibility that the economy will contract in the second quarter as a whole. There is a bumpy road ahead of us.