United Kingdom Economic Forecast

The economy likely had a muted performance in Q1. After strong growth in January, GDP flatlined in February, dampened by public-sector strikes and warm weather capping the power sector. Moreover, retail sales contracted more than expected in March, suggesting a tepid end to the quarter. Turning to Q2, available data is largely promising. In April, the private-sector PMI rose to a one-year high thanks to stronger services activity—particularly related to travel, leisure and entertainment. In the same month, consumer confidence recorded the best reading since February 2022, which, together with the recent extension of the energy price cap through June, bodes well for private spending. That said, PMI data suggests that the manufacturing sector remains in a tough spot amid falling exports and destocking by firms.

Inflation ticked down to 10.1% in March from February’s 10.4% but was well above market expectations. Price pressures will ease later this year on a tougher base effect. Moreover, the extension of the energy price cap through June will tame energy prices this quarter. However, inflation will remain above the Bank of England’s (BoE) 2.0% target in 2023.