For mortgage payers, the latest economic growth figures are a disappointment.
The 0.1% contraction in gross domestic product between April and May tells the Bank of England that the jump in interest rates over the previous 18 months has only had a mild dampening effect on the economy.
A majority of the central bank’s decision-making body – the monetary policy committee – have shown they want to see a much bigger downturn to reduce consumer spending before they pause regular increases in the cost of borrowing.
As such, a further interest rate rise from 5% looks highly probable next month, whatever the inflation rate for June turns out to be when it is published next week.
Resilience is the word commonly used now about the UK economy, and from a central bankers point of view, that is frustrating.
City analysts thought the UK was more susceptible to rising interest rates and one-off events. They were expecting a 0.3% fall in GDP during May. One of the factors cited in their forecasts was the extra bank holiday for King Charles’s coronation, which it thought would lead to a big cut in services and manufacturing output.
However, May’s 0.1% contraction was a big improvement on the 0.7% decreases in June and September 2022 – months when there were also extra bank holidays.
Manufacturing output dropped in May, but only by 0.2%, while April’s figure of -0.3% was revised up to -0.1%.
Martin Beck, the chief economic adviser to the EY Item Club, said: “The impact on output from the loss of a working day was smaller in most sectors than in June and September 2022, while some parts of leisure and hospitality saw a boost from the extra holiday.”
Beck added that “May’s relative resilience” was also partly a reflection of a rebound in public sector output, with industrial action less widespread than in April.
The return to work in the public sector therefore disguised an unspectacular, yet steady fall across most of the private sector.
The category used by the Office for National Statistics to cover “arts, entertainment and recreation” expanded by 4.7%, but there was a marked 0.7% fall in wholesale and retail trading and a chunky 0.5% drop in “professional, scientific and technical activities”.
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Construction and estate agency also contracted, indicating that much of the property sector is already suffering from higher interest rates.
Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, said that, overall the economy remained “listless” and modest growth over the rest of the year should persuade the Bank of England to keep interest rates steady.
If the economy was ever “overheating” it was not now, Tombs said. Resilience is, after all, another word for stagnation in this context.
Yet Tombs is out of step with the international agencies and many UK economists who believe the UK’s 8.7% inflation rate must be stamped out by any means possible. And if governments refuses to use tax policies to calm spending in the economy, then the likes of the International Monetary Fund and the Basel-based Bank of International Settlements, which advises the world’s central banks, are relaxed about further interest rate rises.
Mortgage payers have been warned. Their worst fears are likely to come true.