Economy contracted 0.1% in May – industry reaction

14th July 2023

Figures from the Office for National Statistics (ONS) show the UK economy shrank by 0.1% in May, largely due to the extra bank holiday for the King’s Coronation. This is less than the 0.3% drop predicted by economists, however.

The fall follows growth of 0.2% in April 2023, looking at the broader picture, GDP has shown no growth in the three months to May 2023.

Commenting Kitty Ussher Chief Economist at the Institute of Directors, said “The slight fall in monthly GDP is driven by lower output in the production sector, possibly driven by the extra bank holiday for the King’s coronation reducing manufacturing output. This was partly offset by higher leisure spending.”

“The ONS GDP data for May is consistent with our own survey data that shows confidence flatlining in May after growth in the earlier part of the year.”

“Looking at the detail, a large 3.5% monthly fall in ‘employment activities’ within the service sector is further evidence that the labour market is now cooling, leading to lower demand for the services offered by recruitment companies.”

“Perhaps perversely the Bank of England may take some comfort from this weaker output data, as it suggests demand may be cooling, which in turn reduces inflationary pressure.”

Martin McTague, National Chair of the Federation of Small Businesses (FSB), said “The estimated fall in the headline GDP measure in May is unwelcome, but it is not a surprise. Small firms have been telling us they are facing pressure from all directions, such as interest rate rises, cost inflation and an ongoing late payment culture by big corporates.”

“The monthly fall in the food and beverage sector and overall consumer-facing services output is concerning, showing frail consumer demand in the face of mounting prices and negative real wage growth. We urge the Bank of England to tread lightly when considering further interest rates rises.”

“Ever since the Government downscaled its support on energy bills at the end of March, many thousands of small firms have seen their utility costs going back to the market peak level last summer, up by three- or four-fold from when the more generous support was in place”

“Despite the tough headwinds, small businesses are still looking to the summer for recovery and growth. The Government should build on this spirit of determination and give small firms a lift. We look forward to the imminent conclusion of its payment and cashflow review and hope to see an ambitious package of measures to clamp down on late payments and get funds flowing through supply chains.”

“Cutting their fixed costs – by looking at business rates, increasing the VAT threshold, and ensuring that small businesses trapped on high energy tariffs can ‘blend and extend’ their contracts – would relieve margin pressure, and encourage small firms to fulfil their true potential as the engine of recovery.”

Suren Thiru, Economics Director at ICAEW said “This data confirms that the economy was floundering even before the impact of recent interest rate rises are fully felt as the extra bank holiday for the Coronation curbed output in May.”

“While the economy may rebound in June, the significant squeeze on activity from high inflation, stealth tax hikes and rising interest rates means the Prime Minister may struggle to meet his pledge to get the economy growing.”

“These GDP figures are unlikely to prevent another rate rise in August. However, given the long time lag between rate rises and its effect on the real economy, tightening further risks damaging our growth prospects by overcorrecting for past errors.”