GDP: UK’s exit from recession a 'hollow victory' amid concerns rates could stay higher for longer

Business leaders say there is still a “compelling case” for Bank of England to cut interest rates at June’s meeting.

The UK’s exit from its third recession in 16 years has been described as a “hollow victory” amid poor productivity, high economic inactivity and ongoing political uncertainty.

Official figures suggest that gross domestic product (GDP) - a measure of total economic output - rose by 0.6 per cent between January and March. The initial estimate for the first quarter is stronger than economists had expected but could be skewed by Easter falling earlier this year. It comes after two quarters of decline - which represents a technical recession - in the back half of 2023.

Liz McKeown, director of economic statistics at the Office for National Statistics (ONS), which produces the data, said: “After two quarters of contraction, the UK economy returned to positive growth in the first three months of this year. There was broad-based strength across the service industries with retail, public transport and haulage, and health all performing well.”

Many businesses have failed to survive the tough economic conditions of the past few years which resulted in the UK entering a technical recession during the latter part of 2023.

The outcome marks the strongest quarterly growth since the fourth quarter of 2021. The ONS confirmed the quarterly performance after 0.4 per cent economic growth in March, again boosted by the UK’s service industry.

Suren Thiru, economics director at accountancy body ICAEW, said: “The UK’s escape from recession is a rather hollow victory because the big picture remains one of an economy struggling with stagnation, as poor productivity and high economic inactivity limits our growth potential.

“The economy could struggle to kick on further in the second quarter as the boost to people’s incomes from weaker inflation is partly curtailed by renewed caution to spend and invest, amid higher unemployment and ongoing political uncertainty. The strong exit from recession may inadvertently keep UK interest rates higher for longer by giving those policymakers still worried about underlying inflationary pressures enough comfort on economic conditions to continue putting off cutting rates.”

Markets reacted positively to the GDP figures with a resurgent FTSE-100 gaining fresh ground in early trade amid hopes that a corner has been turned.

Roger Barker, director of policy at the Institute of Directors, said: “Both the quarterly and monthly GDP figures paint an encouraging picture. Based on this evidence, there is no doubt that the spectre of recession is fading fast, and the economy is starting to move forward again.

“However, it would be premature to argue that the economy has definitively turned the corner. Although there are welcome signs of green shoots, any recovery is still at an early stage and it is likely to be fragile. As a result, there is still a compelling case for the Bank of England to cut interest rates at its next meeting on June 20.”

Chancellor Jeremy Hunt added: “There is no doubt it has been a difficult few years, but today’s growth figures are proof that the economy is returning to full health for the first time since the pandemic. We’re growing this year and have the best outlook among European G7 countries over the next six years, with wages growing faster than inflation.”

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