Mortgage payers are expressing disappointment with the latest economic growth figures. The 0.1% contraction in gross domestic product (GDP) between April and May indicates that the previous increases in interest rates have had only a mild dampening effect on the economy, a fact acknowledged by the Bank of England. The majority of the central bank’s monetary policy committee believes that a more significant downturn is necessary to reduce consumer spending before they consider pausing further increases in borrowing costs. Therefore, it is highly likely that we will see another interest rate rise from 5% next month, regardless of the inflation rate for June.
The UK economy’s resilience is seen as frustrating from the perspective of central bankers. City analysts anticipated a greater susceptibility to rising interest rates and one-off events. They had predicted a 0.3% fall in GDP for May, taking into account the extra bank holiday for King Charles’s coronation. However, the actual 0.1% contraction in May is a significant improvement compared to the 0.7% decreases in June and September 2022, both of which also had extra bank holidays.
While manufacturing output did decline by 0.2% in May, it is worth noting that April’s figure of -0.3% has been revised up to -0.1%. Overall, these figures suggest a relatively stable performance in the manufacturing sector.
Martin Beck, the chief economic adviser to the EY Item Club, highlights the smaller impact on output due to the loss of a working day in most sectors compared to June and September 2022. Additionally, certain segments, such as leisure and hospitality, experienced a boost from the extra holiday. The rebound in public sector output, with less industrial action compared to April, also contributed to May’s relative resilience. However, this masks a steady decline across most of the private sector.
Specifically, there was a 4.7% expansion in the “arts, entertainment and recreation” category, but wholesale and retail trading experienced a notable 0.7% decline, and “professional, scientific and technical activities” saw a substantial 0.5% drop.
The construction and estate agency sectors also contracted, indicating that the property market is already feeling the impact of higher interest rates. Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, characterizes the overall economy as “listless” and believes that modest growth over the remainder of the year should prompt the Bank of England to maintain interest rates at their current level.
In this context, “resilience” becomes synonymous with stagnation. However, Tombs’ perspective contrasts with international agencies and many UK economists who argue that the UK’s 8.7% inflation rate must be addressed through any available means. If the government is unwilling to employ tax policies to curb spending, organizations like the International Monetary Fund and the Bank of International Settlements advocate for further interest rate hikes.
Mortgage payers should take heed as their worst fears are likely to materialize.
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