United Kingdom Economic Forecast

The economy eked out a 0.1% quarter-on-quarter expansion in Q1. Strong fixed investment growth drove the reading, while private spending recorded a mild expansion. In contrast, public spending, exports and imports all contracted. Looking at the monthly picture, momentum waned as the quarter progressed, with strong growth in January followed by flat activity in February and a decline in March. Heading to Q2, available signs are mostly encouraging: In April, consumer confidence rose, and retail sales beat market expectations, while the composite PMI averaged higher in April–May than in Q1. That said, PMI data also suggested that the manufacturing sector is struggling amid falling exports and destocking by firms. Moreover, the extra bank holiday in May for the King’s coronation is likely to weigh on the Q2 GDP outturn.

Inflation came in at 8.7% in April, down from March’s 10.1%. April’s result marked the lowest inflation rate since March 2022, but was far higher than market expectations of 8.2%. Looking forward, inflation should continue to trend down on tighter monetary policy, but is still forecast to average double the Bank of England’s (BoE) 2.0% target in Q4 2023.