UK Economy Grows in Second Quarter, But Concerns Loom Amid Mixed Sector Performance

The UK economy expanded by 0.6% between April and June, continuing its recovery after a mild recession at the end of last year.

This growth aligns with forecasts and follows a 0.7% increase in the first quarter of 2024. The services sector was the main driver of this economic recovery, with notable contributions from the IT industry, legal services, and scientific research. These sectors significantly outperformed manufacturing and construction, both of which experienced declines during the same period.

Liz McKeown, director of economic statistics at the Office for National Statistics (ONS), highlighted the significance of this consistent growth, noting, "The UK economy has now grown strongly for two quarters, following the weakness we saw in the second half of last year." The UK had entered a brief and shallow recession in 2023, defined as two consecutive quarters of negative economic growth. The recent upturn marks a positive shift in economic activity, but concerns about sustainability remain.

Despite the positive quarterly growth, the economy stagnated in June. The services sector, which had been a key contributor to growth throughout the quarter, became a drag in the final month. One factor was the impact of strike action by junior doctors, which led to the cancellation of nearly 62,000 appointments across NHS England between June 27 and July 2, affecting overall economic performance.

Economists have cautioned that the second half of 2024 might see a slowdown in growth. Anna Leach, chief economist at the Institute of Directors, pointed to modest business activity during the summer, influenced by persistently high interest rates. Earlier in August, the Bank of England made its first interest rate cut in four years, reducing the rate to 5%. Leach emphasized the ongoing challenge for the government to stimulate long-term growth, stating, "There're no quick fixes here: we’ll need the government to follow through on its manifesto commitments to set and stick with long-term infrastructure investment plans."

The state of the economy was a pivotal issue in the recent general election, which saw the Labour Party win a landslide victory after 14 years of Conservative rule. Prime Minister Sir Keir Starmer, in his King's Speech, pledged to "take the brakes off Britain" by introducing a series of reforms, including changes to the planning system to facilitate easier construction of houses and infrastructure. Chancellor Rachel Reeves acknowledged the scale of the economic challenge, remarking, "The new government is under no illusion as to the scale of the challenge we have inherited after more than a decade of low economic growth."

However, not everyone shares this view. Shadow Chancellor Jeremy Hunt argued that the GDP figures demonstrate the resilience of the economy under Labour’s stewardship. "The GDP figures are yet further proof that Labour has inherited a growing and resilient economy," Hunt stated, countering concerns about the challenges ahead.

The manufacturing sector presented a mixed picture during the second quarter. Although overall output declined, there was some growth in June. Matthew Knight, commercial manager at RNA, a Birmingham-based firm specializing in automation equipment, reported that business was strong, with the ability to sell to different international markets helping mitigate regional downturns. Knight noted that recent interest rate reductions might have positively influenced business, as many customers finance equipment rather than purchasing it outright.

The construction sector, however, faced continued challenges. Output fell by 0.1% between April and June, largely due to a decline in new building projects, though repair and maintenance work saw some growth. The ONS suggested that the rate of decline in the construction sector was slowing, but a survey by the Bank of England indicated that any improvement in sentiment was unlikely to translate into increased activity until later in the year. Further interest rate cuts by the Bank could potentially boost construction if implemented before the end of the year.

Adding to the economic landscape, inflation data for July showed an increase to 2.2%, exceeding the Bank of England's 2% target. However, inflation within the services sector, a critical focus for the Bank, continued to ease. Despite the recent growth in the services sector, Capital Economics, a leading research firm, predicted that this would not prevent further declines in services inflation. The firm anticipates that the Bank of England will reduce interest rates twice more before the year ends, potentially bringing them down to 4.5%.

The UK economy’s recovery, while encouraging, is still fraught with uncertainties. The services sector remains a crucial component of growth, yet its recent volatility and the broader economic challenges suggest that sustained recovery may require further strategic interventions from both the government and the Bank of England. The interplay between interest rates, inflation, and sectoral performance will be critical in determining the trajectory of the UK’s economic recovery in the coming months.