Britain’s economy bounced out of a recession with the strongest growth in more than two years and faster than previously estimated, with services and consumer spending both driving the gains.

Gross domestic product (GDP) expanded 0.7% in the first quarter (1Q2024), the Office for National Statistics (ONS) said on Friday, upgrading its previous estimate for a growth of 0.6%. Most economists had expected no revision.

The figures bolster Prime Minister Rishi Sunak’s argument that the nation has turned the corner after a mild slump last year, though his Conservatives are trailing the Labour opposition in polls ahead of the election next week. The Bank of England (BOE) expects steady growth for the rest of the year, as consumers benefit from rising wages and a loosening of the cost-of-living squeeze.

Services output jumped by 0.8%, revised up from 0.7%, capping three consecutive quarters of decline. That rebound was driven by professional services and scientific research and development. The ONS also reported stronger trade and consumer spending.

On a per person basis, the economy recovered sharply as well. GDP per head was up 0.5%, revised up from 0.4%, following seven consecutive quarters without growth. GDP per head was still 0.6% below where it was a year ago, the ONS said.

UK living standards climbed for a second straight quarter to their highest level since the final half of 2021, driven by rising pay and falling tax, the ONS report showed. Adjusted for inflation, household disposable income per person rose 0.5%, up from a 0.4% gain in 4Q2023. 

The figures are almost certain to be seized on by Sunak’s Conservatives, who are battling to avert catastrophic losses to the Labour opposition in the July 4 general election. The prime minister is trying to convince sceptical voters that the Tories can be trusted to run an economy that is now showing signs of improvement after the worst cost-of-living crisis in decades.

The figures are “good news for whoever is the prime minister this time next week”, said Paul Dales, the chief UK economist of Capital Economics. The economy may be “a bit stronger than the already above-consensus forecast”.

Stronger growth may also make the BOE more concerned about lingering inflationary pressure, potentially holding off its first reductions in interest rates since the Covid-19 pandemic.

“At the margins, all this may make the BOE a bit less comfortable cutting interest rates in August,” Dales said.

Britain’s recovery from the pandemic is still trailing all except for Germany in the Group of Seven nations, with growth of 1.8% since the end of 2019 before the virus struck. The US by contrast has boomed by 8.6%.

UK wages are once again growing faster than prices, helping to repair household finances that were battered by 2022’s energy-price shock and double-digit inflation. A further fillip is expected in the current quarter, after April’s cut in payroll taxes and big increases in welfare payments, the state pension and the minimum wage.

However, it may still leave real incomes no higher than they were before the last election in 2019, and possibly lower. 

There are still signs that consumers remain cautious. The savings ratio, which shows the amount of disposable income that people choose not to spend, rose to 11.1% in 1Q2024, the highest since 2Q2021. That’s a sharp contrast with the US position, where consumers have lifted spending by holding back a relatively small portion of their incomes.

The BOE expects the UK economy to grow 0.5% in 2Q2024, faster than previously projected.

Separate figures showed the current-account deficit, the difference between money leaving the UK and money coming in, narrowed to £21 billion (US$26.5 billion or RM125.28 billion), or 3.1% of GDP, in 1Q2024. Excluding precious metals, flows of which can be volatile, the deficit fell by £2.5 billion to £23.8 billion.

The improvement was driven by a lower trade deficit, which was partially offset by a higher deficit on flows of investment income.

  - Bloomberg