The UK economy returned to growth in May, but industry commentators have warned of ongoing fallout from the Middle East conflict.
Official figures from the Office for National Statistics show monthly GDP grew by 0.1% in May, following an unrevised fall of 0.1% in April.
The growth in May was driven by a 0.3% rise in services, although this was partially offset by falls of 0.5% in production and 0.8% in construction.
Over the three months to May, GDP growth was up 0.7%, compared with the three months to February. It marks the sixth consecutive three-month on three-month growth and follows growth of 0.8% in the three months to April.
Lindsay James, investment strategist at Quilter, said: “Despite fears that momentum in the UK economy had faded, it has surprised with growth of 0.1% in May, reversing the 0.1% fall seen in April.
“The conflict in the Middle East has already left a significant mark on the economy, and while today’s GDP print is better than expected, there is still a risk that the fallout is far from over. While the ceasefire announced earlier this summer briefly improved sentiment, renewed tensions and ongoing disruption have exposed how fragile the situation remains.
“Households are also yet to feel the full impact. While energy bills have risen following the latest increase in the price cap, higher food prices are still feeding through and will add further pressure to already stretched household budgets.”
Rob Morgan, chief investment analyst at Charles Stanley Direct, commented: “The UK economy started the year with decent momentum, but there are now signs that the promising start is fading. With the consequences of the conflict in the Middle East still unfolding an inflationary pulse could squeeze household finances and knock growth further off course.”
Commentators also pointed to the potential implications of a new prime minister for the UK, with Andy Burnham set to come into office next week.
James said: “Markets will be watching closely for any signals on Andy Burnham’s plans for spending, taxation and borrowing. What’s more, ongoing speculation over who will take the role of Chancellor is adding another layer of uncertainty for businesses and risks weighing further on confidence.
“All of this leaves the Bank of England with a tricky path to navigate. Growth is still relatively weak, and inflation risks remain very much alive, particularly with energy and commodity markets still vulnerable to further geopolitical shocks.”
Danni Hewson, head of financial analysis at AJ Bell, said: “For incoming prime minister Andy Burnham, it’s a positive note to begin on. But 0.1% growth is hardly cause for celebration and certainly nowhere near the momentum needed if ordinary people are going to feel the country is working for them.
“Whilst reports that Shabana Mahmood is now front-runner for the position of chancellor do seem to have calmed crucial money markets, nerves about potential tax hikes could create another long autumn of consumer caution.
“Finding the right mix of spending, borrowing and taxation is a kind of alchemy that often feels elusive. Making the right choices is particularly important as technology advances to ensure people aren’t left behind in the race for productivity gains, but cost savings must also be factored into government decisions.
“Only the dominant service sector managed to find a forward gear in May, with both production and construction losing momentum.
“The UK might have delivered the fastest growth in the G7 at the start of the year, but it’s a low bar. And the UK’s high levels of debt make it particularly vulnerable to further inflation shocks which may result from continued conflict in the Middle East.”
