UK economy grows in April

April’s GDP figures met expectations of modest growth (0.2%), with output rebounding following March’s decline, when activity was weighed down by poor weather and industrial action in health, education and the civil service. April’s rise in GDP was driven by an expansion in services output, which offset declines in production and construction.

While these figures re-affirm that the UK has side-stepped a recession so far, underlying growth (as measured on a 3-month rolling basis) was only 0.1%—weak from a historical perspective and leaving GDP just 0.3% above its pre-pandemic level in February 2020. A key contributor to this weakness is the fact that consumer-facing services are still nearly 9% below their pre-pandemic level. Looking ahead, we expect growth to be weak across Q2 as a whole—with the extra Coronation bank holiday likely to have weighed on activity in May—before the economy returns to growth in the latter half of the year. (See our latest economic forecast for more detail on the outlook).

One reason for optimism around the outlook is the continuing strength of the labour market. The total number of people employed rose to a record high of 33.1 million in the three months to April 2023, with an additional 250,000 people in work, helping to push the total number of hours worked in the economy back up to its pre-pandemic high. This was accompanied by signs of an improvement in labour supply, with 140,000 fewer people reported as economically inactive. Meanwhile, the unemployment rate edged up very slightly to 3.8%, well below its pandemic peak of 5.2% and not far above its historic lows.

As we anticipated in our economic forecast, we expect the tight labour market to put further pressure on wage growth in the near term. Average regular pay rose at the fastest pace on record (outside of the pandemic), with a particularly large jump in private sector pay growth. This partly reflected a large increase in the National Minimum Wage in April, but also reflected more persistent wage pressure in response to the strength in inflation.

This is something that the Bank of England have been watching closely, given the potential for rapid wage growth to keep inflation persistently high. Therefore, the latest strength in the pay data will put pressure on the Bank of England to raise interest rates further. We expect two further interest rate hikes of 25 basis points each (bringing rates to a peak of 5% in August). Businesses should be conscious of the impact of these additional rate hikes on broader financial conditions (for example, mortgage rates have already moved higher following April’s inflation data) and therefore on spending in the wider economy.