UK Reaction: A healthcare-driven rebound in growth

• UK GDP surprised to the upside, rising by 0.5% in May, above consensus expectations of a 0.1% rise.
• Healthcare services drove the increase, with a rise in GP visits outweighing the downward pressure from the continued unwind of NHS test and trace and vaccination activity.
• We continue to expect negative growth in Q2 at -0.3% (q/q). The upside surprise to growth increases the chance growth may come in a touch higher than this, but we expect a strong downward adjustment from the additional bank holiday in June figures.
• We expect the BoE to hike by 25bps in August – MPC has signalled a 50bp move is on the table and Governor Bailey’s recent comments highlight this. We see next week’s labour market and CPI as more instructive on whether the MPC increase the pace of hiking. 

UK GDP grew by 0.5% in May 2022, above consensus estimates of a 0.1% rise. This followed a 0.2% decline in April (revised up from a 0.3% decline). The surprise strength in GDP was driven by a bounce back in health services as more people visited their GPs which offset the continued downward pressure from the test and trace and vaccination unwind. However, growth also rebounded strongly in manufacturing and construction sectors. Growth is likely to come in lower next month due to the additional June Jubilee Bank holiday in the UK weighing on output and we continue to expect growth to come in at -0.3% this quarter.

Output in services grew by 0.4% compared to consensus estimates of a 0.1% decline, the rise in services was the main contributor to May’s growth. Industrial production and construction output also rose on the month by 0.9% (consensus 0%) and 0.3% (consensus 1.5%), respectively. Within the services sector, growth was driven by health care – whilst test and trace and vaccination activity continued to fall in May, activity in the sector was bolstered as these falls were offset by increases in GP appointments (this contributed 0.2 ppt in GDP growth on the month). Growth in output in consumer-facing services continues to show weakness, falling by 0.1% in May but travel related activities remained strong. Manufacturing output rose across almost all sub-sectors, posting a 1.4% rise overall.

Despite the upside surprise in May growth, the underlying activity figures remain subdued and going forward the latest survey data and impact of the additional bank holiday point towards weak June data. On balance, we expect growth to fall by 0.3% in Q2. We expect Q3 growth to post a strong rebound of 0.8% due to the bank holiday adjustment and supported by fiscal measures. In our view, growth in Q4 hangs in the balance and we currently expect growth of 0.25% as households face rising utility bills and we expect economic activity to weaken.

We continue to expect the BoE to hike by 25bps in August, September and November, bringing rates to 2% and pausing thereafter. However, the MPC has signalled they are ready to “act forcefully” if greater evidence of inflation persistence emerges. Thus far the data has not signalled this in our view, particularly as inflation expectations have eased slightly in recent months. However, wage growth and firms expectations of wage rises remain hot. Next week’s labour market and CPI releases will be more instructive on this front and will likely determine whether the MPC choses to increase the pace of tightening in August to 50bps. 

Financial markets posted some reaction to the release. Sterling rose against the Dollar and Euro by 0.1%, following the release of the data. Sterling has retraced some of these gains against the Dollar and has fallen lower at the time of writing, whereas it remains stronger than the Euro.