British Economy Shows Strong Growth but Faces Challenges

By David Milliken and Andy Bruce

LONDON (Reuters) – Britain’s economy recorded a second quarter of strong growth as it recovered from last year’s shallow recession. However, it lost momentum entering the second half of 2024, suggesting the Bank of England (BoE) may cut interest rates again.

Gross domestic product (GDP) grew 0.6% in the second quarter of 2024 after a 0.7% expansion in the first quarter, which was the fastest in over two years, as reported by the Office for National Statistics.

In June, output growth slowed to zero from 0.4% in May due to heavy rain impacting retail sales and a doctor’s strike causing a 1.5% drop in healthcare activity.

Sterling edged up slightly after the data release, which did little to alter financial markets’ expectations that the BoE will cut rates once or twice more this year.

Uncertainty ahead of the July 4 election, leading to a Labour Party majority after 14 years in opposition, may have also weighed on June’s growth, according to economist Thomas Pugh from RSM UK. He noted:

“Overall, the UK economy has shown a solid performance in the first half of the year…”

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, predicted slower quarterly growth as interest rates remain near a 16-year high, despite this month’s BoE cut. Wage growth is expected to moderate, and a long-term productivity issue continues.

Earlier this month, the BoE raised its 2024 annual growth forecast to 1.25% from 0.5% due to a stronger-than-expected start to the year and an expected 0.7% quarter-on-quarter growth to June. However, the outlook for the latter half of 2024 was less optimistic, predicting growth of 0.4% in Q3 and 0.2% in Q4, closer to the economy’s underlying growth rate.

SLOW RECOVERY

Britain’s economy has expanded slowly since the COVID-19 pandemic, growing just 2.3% from Q4 2019 to Q2 2024. Among the world’s largest advanced economies, only Germany, also affected by rising energy costs post-Russia’s invasion of Ukraine, has performed worse.

While output per head has risen in the past two quarters, it remains 0.8% lower than pre-pandemic levels as growth has not kept pace with population increases fueled by record immigration.

Prime Minister Keir Starmer has targeted 2.5% annual economic growth during his campaign ahead of the July 4 election, a rate Britain has not consistently achieved since before the 2008 financial crisis. Finance Minister Rachel Reeves aims for the fastest per capita GDP growth in the G7 for two consecutive years.

Reeves emphasized the latest data shows the challenges the new government faces, stating she would need to make tough decisions to enhance economic fundamentals.

Economist James Smith from ING believes the strong quarterly growth is unlikely to provide Reeves with additional spending power for her October 30 budget, as forecasters will likely maintain their long-term outlook for Britain’s potential.

Since the late 2000s, productivity growth has slowed in advanced economies, limiting living standard increases. Britain’s longstanding issue with low business investment has been worsened by the 2016 vote to leave the EU.

Business investment in Q2 was 1.1% lower than a year earlier.