The UK economy shrank 0.1% in May, less than the 0.3% contraction expected by economists.
UK GDP provided little reason for optimism, although, it should make households and investors slightly less pessimistic. A smaller-than-expected contraction is good news for avoiding a recession, and a slowing economy will be considered by the Bank of England when deciding on future rates.
“While the economy shrank modestly in May, that could be down to the extra bank holiday for the Coronation as well as industrial action across the health, rail and education sectors. If true that would suggest the underlying picture is of an economy that remains strong, despite the Bank of England’s attempts to cool activity with higher interest rates,” said Nicholas Hyett, Investment Manager, Wealth Club.
Moneyfarm’s Chief Investment Officer highlighted the conundrum for the government and their fiscal strategy in a low-growth environment.
“Stagnant GDP growth, while better than expected, still represents a challenge for the government in its wage negotiation with public sector workers. The combination of a high cost of debt and an already high tax burden leaves the government few with options to address the cost of living concerns in the public sector,” said Richard Flax, Chief Investment Officer at Moneyfarm.
GBP/USD rose following the release as traders ultimately maintained positioning for pound strength in the face of high UK inflation and soaring wage growth.