The UK economy expanded modestly in May, with gross domestic product (GDP) rising 0.1% according to new data from the Office for National Statistics (ONS), largely meeting market forecasts. The growth was driven entirely by the services sector, which accounts for over 80% of economic output and grew 0.3%, offsetting sharp declines elsewhere.
Services sector props up economy amid manufacturing slump
Manufacturing fell 0.8% and overall production dropped 0.5% in May, highlighting the fragility of the recovery. Despite this, the services sector's expansion helped the economy avoid a downturn. Liz McKeown, director of economic statistics at the ONS, said: "While all three main sectors grew over the three months to May, the slight growth in GDP in May was driven by services alone, with production and construction both falling back." She added that activity in services came from computer programming and advertising, while the "often-volatile pharmaceutical industry also performed well."
Science and technology boost GDP
Science and technology activity rose 1.8% in May, largely propelled by a 5.1% surge in research and development on the back of medical sciences. The ONS reported that this sector alone contributed 0.06 percentage points to real GDP growth. The figures follow a 0.1% slip in April, which came after a robust first quarter comprising growth of 0.3% in March and 0.4% in February.
Iran conflict and energy costs weigh on outlook
The eruption of hostilities in Iran at the end of February sent shockwaves through global economies, stoking inflationary pressures as oil prices rocketed to highs of $120 per barrel. Scott Gardner, investment strategist at JP Morgan Personal Investing, said: "The services sector continues to do most of the heavy lifting, helping to keep the economy steady. With momentum still proving difficult to sustain and the situation in Iran remaining uncertain, this reading highlights the economic challenge facing the next Prime Minister. They will inherit a difficult hand as inflation remains above-target and the Iran conflict continues to dampen growth." Chancellor Rachel Reeves has said that it was "not a war we wanted or joined, but one that will have an impact at home."
Political implications and fiscal challenges
The latest data will rank among the final entries on Reeves' scorecard before she is expected to be moved on from the Treasury, with Andy Burnham set to become Prime Minister. Reeves used her Mansion House address this week to defend her record on growth and public finances, warning her successor that "radical governments without credibility have ultimately failed to win the trust necessary to deliver their agenda." Energy Secretary Ed Miliband had been widely regarded as the leading contender to replace Reeves, but briefings from his detractors suggest he has slipped down the pecking order. Home Secretary Shabana Mahmood has since emerged as the preferred candidate for No. 11.
OECD forecasts and reform recommendations
Whoever takes the reins at the Treasury will face an enormous strain on public finances. The OECD forecast this week that economic growth would stagnate at 0.9% for the year. The leading independent economics body also cautioned that government debt is projected to exceed 105.4% of GDP by 2027, a figure that could balloon to 200% by 2050 in the "absence of policy changes and considering ageing costs and climate damage." Economists put forward a package of reforms which, if successfully enacted, the OECD said could boost GDP by as much as four per cent within a decade. Central to these recommendations is the "essential" consolidation of taxes, which the organisation noted were sitting at "historically high levels."
