Recession concerns remain in UK despite growth in May

LONDON - While the latest data showed on Wednesday that the United Kingdom's (UK) economy returned to growth in May, analysts said it was too early to rule out the possibility of recession amid persistent high inflation choking households and businesses alike.

UK gross domestic product (GDP) grew by 0.5 percent in May after a decline of 0.2 percent in April, the Office for National Statistics (ONS) said on Wednesday.

Services output grew by 0.4 percent in May, with production up 0.9 percent and construction 1.5 percent. UK GDP increased by 0.4 percent in the three months to May and by 3.5 percent in the 12 months to May.

The economy rebounded in May with growth across all main sectors, and health was the biggest driver with many more people seeing general practitioners despite test and trace and the vaccination programs winding down, according to Darren Morgan, ONS director of economic statistics.

Manufacturing rose by 1.4 percent in May. Morgan said there was solid growth across manufacturing after several tough months. Construction also fared well with housebuilding and office refurbishment driving growth.

Though beating expectations and having eased fears that the UK economy would dip into recession, the latest figures were considered to be built on a shaky basis.

"May's GDP data is not as strong as it looks," and the rebound was primarily driven by a rise in healthcare output, which has been extremely volatile lately and will not provide the basis for sustained growth, said Tom Pugh, an economist at the business advisory firm RSM UK.

On top of that, Pugh added, the output of customer-facing services fell due to a fall in retail trade, suggesting that the cost-of-living crisis is now taking its toll on consumer spending.

The shrinking economy in April and the persistent high inflation have raised concerns about recession, and the latest figures, though positive, were considered not strong enough to rule out the possibility.

As the UK Consumer Prices Index (CPI) rose by 9.1 percent in May and the Bank of England expected inflation to rise above 11 percent in October, rising prices have kept putting pressure upon households and businesses.

Sales in the UK decreased by 1.0 percent in June, against an increase of 10.4 percent in June 2021, the British Retail Consortium (BRC) said on Tuesday.

"Sales volumes are falling to a rate not seen since the depths of the pandemic as inflation continues to bite and households cut back spending," said Helen Dickinson, BRC chief executive.

More than four in five UK firms cited inflation as a growing concern for their business in the second quarter, reaching an all-time high, according to a survey conducted by the British Chambers of Commerce (BCC) earlier this month.

The results "clearly point to a weakening economic outlook amid unprecedented cost pressures and falling business confidence," said David Bharier, BCC head of research.

Analysts also expected the holidays in early June to bring about a drop in economic activities for the month and a contraction in the second quarter as a whole.

A comparison of independent forecasts for the economy published by the UK Treasury in June showed an average forecast of 3.6 percent for GDP growth in 2022 and 0.9 percent for 2023, down from May's 3.9 percent and 1.3 percent, or February's 4.4 percent and 2 percent, respectively.

"The recent resilience of GDP to the drag from the high rate of inflation probably won't last and there is still a big risk that the economy falls into recession," said Paul Dales, chief UK economist at the London-based consultancy Capital Economics.

With real household disposable incomes set to fall further in the third quarter (Q3), "a recession is still a real risk," Dales added.