The UK has exited recession, after the economy grew by a better-than-expected 0.6% between January and March, but investors are advised to be cautious.
It is the fastest growth in two years and above the 0.4% economists had predicted.
The economy was boosted by services and manufacturing, which helped to offset a 0.9% drop in construction during the first quarter, the figures from the Office for National Statistics show.
Danni Hewson, head of financial analysis at AJ Bell, said the figures would provide a welcome boost.
“The UK has charged out of what will go down in the history books as the shortest, shallowest recession on record. After months of floundering around a flatline, growth of 0.6% will give the UK economy a real confidence boost. Falling inflation and rising wages have given households a bit more in the tank and they’ve upped their spend, something that will need to continue if the trajectory is to be maintained.”
However, Andrew Oxlade, investment director at Fidelity International, said the UK would still need to be cautious, despite the encouraging data.
“It’s reason for some cheer, with the economy growing at its fastest rate since 2021 and now growing at a similar pace to the US and Europe. But it’s perhaps a little early to call this a return to long-term growth rates. The recovery is likely to be painfully slow from here; the Bank of England expects the economy to register annual growth of only 1% for the full year of 2024,” he commented.
Industry commentators said the growth will place greater pressure on the Bank of England to lower interest rates, after it chose to keep rates steady at 5.25% at its latest Monetary Policy Committee meeting on Thursday. During the meeting, governor Andrew Bailey said that although the UK was seeing recovery, it was not a strong one.
Oxlade said: “What the economy needs is lower rates to ease the burden on businesses and help mortgage borrowers and would-be house buyers. Rates were held again yesterday with a signal from the Bank that a cut next month was a real possibility with inflation likely to drop below the 2% target. However, the stronger than expected GDP figures will weigh on that decision.
“Today’s figures showed a slump in the construction industry, with the sector contracting 0.9% in the first quarter. This is unsurprising given that house prices have remained fat in the past year. The response from individual investors is to remain cautious.”
Hewson commented: “Andrew Bailey painted a bucolic picture of a recovering economy which will be further boosted by any rate cut tailwinds. But the resilience being demonstrated by most sectors could be seen as a reason for MPC members to keep their finger on the pause button for a little while longer. Those green shoots we’ve heard so much about since the start of the year have sprouted nicely but it will only take one spring storm to damage the burgeoning flowers.”
Meanwhile, Richard Carter, head of fixed interest research at Quilter, said that despite the UK emerging out of recession, any interest rate cuts to come will be slow and steady.
“The Bank of England has stressed that it is awaiting confirmation that inflation is under control, and even if it were to cut in June, it will only be the beginning of a slow and gradual easing of interest rates. It will be especially worried of triggering any fresh bout of inflationary pressures so will move slowly, even if this does risk being overly constrictive for a prolonged period of time.
“That said, the UK is clearly entering a more optimistic period. The government will be hoping to take advantage of this in the lead up to the general election, however, there are still factors, such as productivity and manufacturing struggles, that will weigh on economic growth for some time.”
Main image: ake-weirick-_NWp0h-zwZc-unsplash
