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Conservatives on Friday wasted no time in leaping upon official figures showing a turnaround in the UK economy, as they sought to turn the page after suffering a hammering in the local elections.
The 0.6 per cent quarterly rise in GDP confirmed the country had emerged from last year’s technical recession, a day after the Bank of England made encouraging noises about the prospects of interest rate cuts.
The higher than expected numbers have provided welcome news to Tories arguing the economy should sit at the heart of their general election platform.
The GDP figures, said chancellor Jeremy Hunt in a statement on Friday, suggested the economy is “returning to full health” for the first time since the Covid pandemic. Downing Street insiders noted, meanwhile, that stronger growth could create room for more tax cuts later this year.
But economists warned the bounce does not mean the UK has escaped its longer-term, low-growth trap, with GDP per head languishing 0.7 per cent lower than this time last year.
Voters still bear the scars of the worst inflationary upsurge in a generation, leading pollsters to predict Prime Minister Rishi Sunak will struggle to generate an electoral tailwind from the growth data ahead of the election, expected in the autumn.
Prevailing factors that have held back the economy — including Brexit and low public and private investment — have not suddenly disappeared, argued Michael Saunders, a former Bank of England rate-setter who is now at the Oxford Economics consultancy.
“I don’t think we have broken out of the long period of sluggishness,” he warned.
The Office for National Statistics release suggested the first-quarter upturn was relatively broad-based, as GDP increased at the quickest pace in two years.
Business investment, a key focus of the chancellor’s recent corporate tax reforms, was up 0.9 per cent in the first quarter of 2024, and by 9.8 per cent since the start of 2022, suggesting the government’s tax incentives to capital spending are bearing fruit.
UK growth in the first quarter was faster than in the US, at 0.4 per cent, and in the eurozone, at 0.3 per cent — and the highest among the G7 countries with available data.
The stronger performance did not end in March, which is a positive sign for Sunak, who wants to see an continuing economic tailwind as the election approaches.
The S&P Global purchasing manager indices indicated that the construction sector — which contracted 0.9 per cent in the first quarter — returned to growth in April, while the services sector continued to expand. Consumer confidence rose two points in April, as expectations over the economy improved.
This came on the back of signals from the BoE on Thursday suggesting it is preparing to lower interest rates for the first time in four years.
Economists see a cut coming as soon as June, although BoE chief economist Huw Pill on Friday said it would be “ill advised” to focus too much on that meeting.
Hunt has predicted that recent reductions in national insurance will foster a more upbeat mood in the electorate, especially if coupled with lower official interest rates.
The first-quarter numbers point to upgrades to forecasts for full-year GDP growth, some analysts said, with the BoE’s own 0.5 per cent prediction now looking cautious.
One Downing Street official said “better than expected growth” could make it easier for Sunak and Hunt to deliver their public commitment to cut taxes further, on top of the 4p reductions to national insurance in November and March. Officials have told the FT the chancellor wants to lop another 2p off the levy.
“The election is still quite a way off; obviously if things keep going in this direction, there is no reason to believe we can’t cut taxes,” they said, arguing that this was the best way to get growth going. “If there’s fiscal headroom that’s obviously the priority.”
A Downing Street spokesperson said: “I wouldn’t pre-empt any fiscal events but more generally we want to cut taxes further where we can and where it is financially responsible to do so.”
However, the public view of the Conservatives’ economic record remain downbeat, underscored by YouGov polling that shows Labour holds a persistent lead over the Tories when it comes to the party that will best handle the economy.
Sunak also faces a prodigious task undoing the damage to the Conservatives’ brand for economic competence wrought by former prime minister’s Liz Truss’s ill-fated “mini” Budget in 2022.
The UK remains stuck in a spell of persistently sluggish growth. First-quarter UK output was barely changed from the same quarter last year and was only 0.5 per cent up from two years before. It continued to underperform its pre-pandemic trend as well as its pre-financial crisis trends.
GDP per capita, which matters for living standards, is 1.2 per cent below its level on the eve of the pandemic, compared with a 5.4 per cent expansion in the four-year period up to the end of 2019.
While inflation has decelerated to 3.2 per cent as of March from its 11 per cent peak in 2022, the overall level of prices, measured by the consumer price index, remains more than 21 per cent higher than the same point in 2021 before inflation took off.
The Office for Budget Responsibility, the fiscal watchdog, does not expect real household disposable income to regain its pre-pandemic peak until 2025-26.
Tom Lubbock of polling firm JL Partners said it was “pretty dangerous” for the Conservatives to tell the public the economy had turned a corner on the basis of the 0.6 per cent increase in first-quarter GDP, because for so many voters “the pain did not stop when inflation peaked”.
“The reality for most voters is still pretty bad in terms of the cost of living — and they have not got the sense that the economy is improving or doing better,” said Lubbock. “The mood is extremely unreceptive.”
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