This month’s economic indicators suggest a bright outlook for the UK, with multiple sectors benefiting from sunny weather, Taylor Swift’s tour and Euro 2024. Inflation remained steady at the 2% target, GDP increased and interest rates were cut for the first time since March 2020. Additionally, business confidence reached a two-year high, according to ICAEW’s Business Confidence Monitor (BCM). While these signs indicate a recovery from the recession, upcoming data will reveal whether the UK's resurgence is sustainable and if more rate cuts are on the horizon.

UK economic activity bounced back

The UK economy grew by 0.4% growth in May, according to official figures, up from zero growth in April. The improvement was broad based with activity rising across all main sectors of the economy. Retailers had a particularly good month as the sector bounced back from a weather-induced fall in April. A pick-up in new housebuilding and infrastructure work helped construction output grow at its fastest rate since June 2023. May’s GDP uptick may have been followed by a more muted performance in June, with wet weather and strike action in the health sector likely to have stifled economic output, despite a helping hand to hospitality and some retailers from Euro 2024.

Business Confidence highest for two years

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – rose from 14.4 to 16.7 on the index in Q2, the highest reading since Q1 2022 and is consistent with the stronger economic growth recorded the official data (see Chart 1). Lower inflation and stronger expected sales growth drove an encouraging uptick in confidence in the second quarter.

Did Taylor Swift impact UK inflation?

UK CPI inflation held steady at 2.0% in June 2024, the second successive month that inflation has been at the Bank of England’s 2% target. The downward pressure on the headline rate from falling clothing and footwear costs and slower food inflation was offset by higher hotel prices and second-hand car costs falling by less than the same month last year. The strong pick-up in hotel price growth is suggestive of a so-called Taylor Swift effect on inflation. However, while hotel inflation rose from 7.0% to 9.8% in June (see Chart 2) as the singer toured Edinburgh, Liverpool, Cardiff and London in the month, cultural services inflation, which would capture any impact from the ticket prices, eased from 7.4% to 7.3%.

Major interest rate-cutting cycle unlikely

The Bank of England cut interest rates for the first time since March 2020 to 5.00%, but still well above the twenty-year average of 3.1% (see Chart 3). The Monetary Policy Committee (MPC) voted 5-4 in favour of this outcome. The split vote decision suggests this was a rather ‘hawkish’ rate cut and so is unlikely to herald the start of a major interest rate-cutting cycle. With the bank forecasting that inflation will drift higher in the coming months, the MPC is likely to put off lowering interest rates again until the end of the year. The next interest rate decision is on 19 September.

Regulatory concerns reach four-year high  

ICAEW’s BCM also revealed that challenges relating to regulatory requirements increased again in Q2 2024, with 43% of businesses citing this as a growing issue, the highest since Q2 2020. High levels of regulatory concern tend to be very sector-specific, with companies in Energy, Water and Mining, and Banking, Finance and Insurance most likely to report them as an issue. There are other signs that trading conditions remain challenging for businesses. In Q2 2024, 21% of companies reported that late payment from customers was a growing issue and is most pronounced in certain sectors, including Construction, Business Services, and Manufacturing and Engineering.

Second-highest company insolvencies since 2009

Insolvency Service data showed that the number of registered company insolvencies in England and Wales in June 2024 was 2,361, the second highest number since 2009 and 17% higher in annual terms. This increase largely reflected the impact of increased costs from higher interest rates and the surge in inflation. June is also a month when quarterly rent payments are typically due. At 17%, the construction sector accounted for the highest proportion of insolvencies, followed by retail and hospitality.

Implications for accountants, business owners and the economy

Taken together, these findings mean that the economy is on track for strong GDP growth in the second quarter. However, longer-term, the new government faces an uphill struggle to achieve its ambition to uplift the UK’s annual growth trajectory to 2.5%, unless it can substantially increase productivity and tackle economic inactivity.

UK economy – what to watch for this month:

1. The latest labour market figures due out on 13 August will be closely watched by the Bank of England who remain concerned that wage growth is too hot, adding to the upside risks to inflation.
2. While the next GDP data, to be released on 15 August, may show a slight slowdown in GDP growth in June, overall second-quarter GDP released at the same time is on track to rise by 0.5-0.6%, after 0.7% growth in the first quarter.
3. The Q2 figures for productivity and business investment which will also be published on 15 August, will provide an indication of whether the UK's recovery from recession is built on firm foundations.

Links

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