GDP data strengthen the case for monetary tightening, says IEA economist
IEA Research discussed in City AM
“The latest GDP figures should ease fears that the UK economy is already tumbling into recession, but this will not be much comfort to those struggling to pay their bills.
“The headline growth of 0.5 per cent in May partly reflected a recovery in the number of GP appointments. But looking after people’s health is valuable activity that contributes to wellbeing, so it is right that it is included. In any event, GDP also rose by 0.3 per cent excluding health, which was also better than expected.
“Other services are holding well, despite the cost of living crisis, with manufacturing production and construction both rising on the month.
“Monthly GDP probably dropped back in June, due to a temporary hit from the Jubilee holidays. But there is now a much better chance that the UK economy avoided a contraction in the second quarter as a whole.
“What’s more, excluding NHS Test and Trace and the vaccine programme, UK GDP rose by 0.7 per cent in May and by between 0.4 per cent and 0.8 per cent in each of the first five months of this year. This is consistent with the more positive signals from business surveys, notably the purchasing managers indices, and with the continued strength of the labour market.
“Nonetheless, this government may still need to do more to support households and businesses in the autumn, when energy bills are expected to jump again. The resilience of the economy and the Treasury’s windfall from higher nominal incomes and prices should be good for tax revenues and hence provide more room for cuts in tax rates.
“In the meantime, today’s GDP data strengthen the case for the Bank of England to step up the pace of monetary tightening at its August meeting, Simply repeating that mantra that the Bank ‘will do whatever it takes to control inflation’ is just not good enough. A half point increase in interest rates is now the bare minimum required to restore some credibility.”
Notes to editors
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IEA spokespeople are available for interview and further comment.
Further IEA reading: Inflation: The next threat?, by Dr Juan Castaneda and Professor Tim Congdon