UK's return to growth piles rate rise pressure on BoE

The UK economy enjoyed a strong month in May, growing by 0.5%, after -0.2% in April (revised up from -0.3%) and 0.1% growth in March (revised up from -0.1%).  

The latest reading of the health of the economy beat consensus expectations of no growth. It should raise pressure on the Bank of England (BoE) to raise interest rates faster to combat heightened inflation.

Within the details of the report, the services sector was the biggest contributor, growing by 0.4% in May. A surge in GP appointments (+15%) offset the large fall in healthcare activity relating to the winding down of the NHS Test and Trace and vaccination programmes.

Meanwhile, overall production grew by 0.9%, mainly thanks to manufacturing output rising 1.4%. The construction sector recorded its seventh consecutive month of growth, as output grew by 1.5%, mainly due to new projects coming online. 

Looking ahead, June is likely to show a large contraction in activity due to the additional bank holiday to celebrate the Her Majesty the Queen’s Platinum Jubilee. Various disruptions to transport services due to industrial action are also expected to weigh on output.

While July is likely to show a rebound, ongoing industrial action and the current heatwave looks set to dampen activity, especially for the retail sector.

For monetary policy, the next BoE Monetary Policy Committee meeting on 4 August should deliver at least a 0.25% increase in interest rates. The argument for a larger rise, however, is strengthening.