UK GDP continues to grow in May

Data published by the Office for National Statistics (ONS) this month showed that the UK economy grew robustly in May. Monthly real GDP increased by 0.4% in May 2024 after stagnating in April (Figure 1).

Figure 1: Monthly UK GDP growth and its contributions, May 2023 to May 2024

Source: ONS

The ONS observed that “all three main sectors contributed positively to GDP growth in May 2024. Services output grew by 0.3%, with it being the largest contributor to the growth in GDP. Production and construction output also increased by 0.2% and 1.9%, respectively”.

Looking at a slightly longer time period the ONS estimates that real UK GDP grew by 0.9% in the three months to May 2024 compared with the three months to February. The ONS notes this growth was “driven by a growth of 1.1% in services output” and that it was “the strongest three-monthly growth since January 2022”.

UK inflation remains on target in June

The ONS also published Consumer Price Index (CPI) inflation for June this month. This showed that CPI inflation remained steady at 2.0% in the 12 months to June 2024, matching the rate from May (Figure 2). This is in line with the Bank of England’s inflation target and significantly lower than the peak of 11.1% in October 2022. The ONS notes that the largest upward contributions to inflation “came from restaurants and hotels, where prices of hotels rose more than a year ago; the largest downward contribution came from clothing and footwear, with prices of garments falling this year having risen a year ago”. Beyond the headline figure other measures stayed generally steady. Core CPI (excluding volatile energy, food, alcohol and tobacco prices) inflation was 3.5% over the year to June 2024, unchanged from May. The CPI goods annual rate fell from negative 1.3% to negative 1.4%. However, the CPI services annual rate, although remaining unchanged at 5.9% in June, continues to be stubbornly elevated having dropped only 1.7 percentage points from its recent high of 7.4% in July 2023.

Figure 2: CPI, goods, services and core annual inflation rates, UK, June 2014 to June 2024

Source: ONS consumer price inflation data

Pound reaches one-year high against US dollar

The pound has emerged as the best-performing G10 currency of 2024 so far (Figure 3), reaching a one-year high against the US dollar. Stronger-than-expected economic growth, a cautious approach to interest rate cuts by the Bank of England, and stability in the UK together are believed to be behind this performance.

Figure 3: Pound Sterling Outperforms Other Currencies in 2024
Measured by gains against the US dollar since the start of the year (%)

Source: Google Finance currencies data

In June, the pound was buoyed by a decline in the US dollar, following lower-than-expected US inflation rates which implied the possibility of cuts in their interest rate. Coupled with the UK’s strong economic performance in May, as reported by the ONS in July, the pound rose to a one-year high against the dollar.

IMF warns that global service inflation is holding up reductions in global inflation

The International Monetary Fund (IMF) updated its World Economic Outlook forecast this month. Its forecast for global economic growth remains similar to the April 2024 forecast. The IMF stated, “varied momentum in activity at the turn of the year has somewhat narrowed the output divergence across economies as cyclical factors wane and activity becomes better aligned with its potential”. However, the IMF further added that “services price inflation is holding up progress on disinflation, which is complicating monetary policy normalization”. This increases the risk of higher interest rates for a longer period, especially with rising trade tensions and greater policy uncertainty. While, it also noted that “upside risks to inflation have thus increased, raising the prospect of higher-for-even-longer interest rates, in the context of escalating trade tensions and increased policy uncertainty”.

Still the world economy is expected to grow at a steady rate of 3.2% in 2024 (unchanged on its April forecast) and 3.3% in 2025 (a 0.1 percentage points upgrade on April). The US is expected to see growth of 2.6% this year (a downgrade of 0.1 percentage points on April) and 1.9% next year (unchanged on April). The Eurozone is also expected to see growth of 0.9% this year (a 0.1 percentage points upgrade on April) and 1.5% next year (unchanged on its April forecast). This compares to forecast growth in the UK of 0.7% in 2024 (a 0.2 percentage points upgrade on April) and 1.5% in 2025 (unchanged on its April forecast).

GLA Economics forecast moderate growth for London in 2024, and faster growth in 2025 and 2026

This month we published our latest forecast for London[1]. With the recent significant easing in inflation pressures, our baseline central scenario, which is consistent with Bank of England and Office for Budget Responsibility projections, suggests that the capital’s output will be subdued this year, with growth of 1.1%. Growth is expected to gain momentum in 2025 before picking up more in 2026, though it will remain below historic averages. Also, London’s economy has outperformed the wider UK in recent data, so any positive shocks to the national economy should lead to an even more optimistic outlook for the capital. Consequently, we expect London’s GVA growth rate to return to around 2% by 2026, which is projected to be faster than the overall UK growth rate.

On the employment side, the labour market has proven strikingly resilient in the past year. As a result, our forecast for this year has improved. We maintain the same projection for the growth rate of workforce jobs at 1.3% in 2025 as in the December 2023 LEO forecast[2], with a slight increase to 1.5% in 2026.

This central scenario forecast is accompanied by two others: a plausible upside (fast growth) and a plausible downside (weak growth). The economic outlook for both London and the UK is subject to a high level of uncertainty, with a range of risks which could push the forecast in either direction. Nevertheless, all three of our forecast scenarios anticipate a growth in output in the coming quarters.

In our fast growth scenario the London economy is expected to recover stronger economic growth in the medium term. This scenario sees a robust recovery as London’s relatively higher-income consumers are cushioned by a buffer of savings built up over the pandemic and its aftermath, and inflation fades swiftly. Richer households spend more of their pandemic savings, lower inflation allows the Bank of England to ease interest rates earlier, and the labour market remains strong. As a result, most consumers stay afloat with savings or manageable cutbacks. We also assume that positive business sentiment sees firms absorb higher costs and flagging demand by moderating hiring and investment, rather than making cuts. Output growth gains momentum and jobs pick up quickly across the medium-term. As demand strengthens, stronger business investment, less long-run unemployment and higher productivity eliminate long-term output scarring.

On the other hand, in the weak growth scenario London’s economy will grow at a more subdued pace. The key defining feature of this outlook is inflation. Although CPI inflation eased to the Bank of England’s target rate of 2.0% year on year in May, the time it takes to stabilise around target is unclear, and the Bank expects a slight tick up in inflation later in the year. If inflation proves to be stubborn, it will drag on incomes and keep interest rates high, which could prompt businesses to defer investment. The slower this stabilisation, the harsher and longer lasting is the likely reaction from monetary policy, and the greater the risk of financial dislocations. Further, despite moderating inflation, poorest households are still being hit hardest by the recent surge in the costs of essential goods. As a result, we expect London’s output to grow slowly in the medium-term. Slow growth mean firms close and workers lose their jobs, which creates serious long-term economic scarring.

Figures 4 and 5 show the estimated scenario paths for London’s output and jobs over the medium term.

Figure 4: Scenario paths for London’s output over the medium term

Source: GLA Economics projections, built on ONS historical data; Note: level of output indexed to Q4 2019 100

Figure 5: Scenario paths for London’s workforce jobs over the medium term

Source: GLA Economics projections, built on ONS historical data; Note: level of output indexed to Q4 2019 100

London businesses report improving business confidence

July saw the publication of the Q2 2024 Capital 500 quarterly economic survey from the London Chamber of Commerce and Industry (LCCI). This surveys a representative sample (of all London businesses by company size and broad industry sector) of LCCI members to “gauge their business performance and general confidence levels across the capital”. This most recent survey found that “business confidence soared in Q2, with more than half (52%) of London companies expecting their profitability to improve over the next 12 months, compared to just 15% who anticipate a decline. This optimism pushed the net balance up 9 points to +37, setting a record for the survey”. The survey also found an improvement in the reported cashflow of London businesses with the net balance, representing the percentage reporting an increase minus those reporting a decrease rising “9 points to -2 in Q2 2024, the highest level since Q3 2021. Over a quarter (27%) of firms reported increased cashflow in Q2, up from 24% in Q1”. The report also noted some positive improvement in cost pressures for firms, although these remained above pre-2022 levels.

GLA Economics will continue to monitor all these and other aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.

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[1] GLA Economics (2024), ‘London’s Economic Outlook: Summer 2024’, July 2024  

[2] GLA Economics (2023), ‘London’s Economic Outlook: Autumn 2023’, December 2023