Economic indicators reveal the UK economy stagnated in April, largely due to wet weather impacting retail, manufacturing and construction. However, services spending grew slightly, showing underlying resilience. With higher incomes and weakening inflation (now at the 2% target) can the economy rebound from April’s disappointing growth?

UK economy flatlines in wet April

According to the latest official figures, the UK economy didn’t grow at all in April, a marked deterioration from 0.4% growth in March. This slowdown was primarily driven by the significantly wet weather in the month, which weakened key drivers of GDP, notably retail, manufacturing and construction.

In contrast, overall spending on services grew by 0.2% in April, driven by stronger output from business services firms, including information and communication activities. Despite flatlining in April, UK GDP is estimated to have grown by 0.7% in the three months to April 2024, compared with the previous three months.

Major inflation milestone reached

UK CPI inflation slowed from 2.3% to 2.0% in May 2024, the first time since July 2021 that inflation has dropped back to the Bank of England’s 2% target (see Chart 1). May’s slowdown was largely driven by easing inflation for food and soft drinks, which slowed to 1.7%, the lowest rate since October 2021.

Any relief over inflation returning to target should be tempered by the legacy that the cost-of-living shock has left behind, including price levels that are more than 20% higher since inflation was last at target. Services inflation – a measure the Bank of England pays close attention to when setting interest rates as a key indicator of underlying price pressures – fell only slightly from 5.9% in April to 5.7% in May. 

Unemployment rate rises to two-year high

The UK unemployment rate increased to 4.4% in the three months to April 2024, the highest rate since July-September 2021 and up from 4.0% in the previous three-month period. Approximately 132,000 more people dropped out of the UK total economically active over this period, mainly due to people being off work sick. This took the total of economically inactive – people who are neither working nor looking for a job – up to 9.4 million, a rise of 385,000 over the past year.

UK regular pay growth (excluding bonuses) was 6.0% in the three months to April 2024, unchanged from the previous three-month period. With UK inflation cooling at a much faster rate, pay growth in real terms is accelerating, increasing people’s spending power. Real regular pay grew by 3.7%, the highest since the summer of 2021 (see Chart 2).

First interest rate cut edging closer

The Bank of England kept interest rates on hold for the seventh successive meeting, at 5.25%, a 16-year high. The Monetary Policy Committee (MPC) member voting split in favour of this outcome remained unchanged at 7-2.

The central bank described this as a “finely balanced” decision, with policymakers divided over the risk of second-round inflationary pressures (where inflation starts to have an indirect impact, such as pushing up wages). While an interest rate cut in August or September looks probable, the lack of movement in the vote split towards loosening policy means it is not a done deal.

Mortgage arrears hit eight-year high, but corporate insolvencies fall

Official data shows that the proportion of loan balances with arrears, relative to all outstanding mortgage balances, rose to 1.28% in Q1 2024, the highest rate since Q4 2016 (Chart 3). While arrears are still low compared with the record high of 3.64% during the global financial crisis, this figure marked a continued reversal of a long-term decline in overdue payments.

In contrast, Insolvency Service data shows that the number of registered company insolvencies in England and Wales in May 2024 was 6% lower than in April and 21% lower in annual terms. Construction businesses made up the highest percentage of firms going insolvent, at 18%.

Implications for accountants, business owners and the economy

The UK economy should bounce back from April’s lacklustre GDP outturn, with the uplift to people’s incomes from weaker inflation likely to drive output higher in the coming months.

However, the longer-term outlook will be heavily influenced by the extent to which policymakers are able to tackle the long-standing structural issues holding back our economy, including poor productivity and high economic inactivity. 

UK economy – what to watch for this month:

1. ICAEW's Q2 2024 Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – will be launched on 10 July.
2. The next GDP data, to be released on 11 July, should show a pick-up in GDP growth in May (from zero growth in April), driven by better weather and the boost to activity from lower inflation.
3. June’s inflation figures, to be published on 17 July, will be closely watched by the Bank of England ahead of the next interest rate decision on 1 August. A notable drop in services inflation would make an August rate cut much more likely.

Useful links

The ICAEW Annual Conference 2024 has launched. Join us on 4 October for key insights from leading industry experts on navigating an ever-shifting economy and ensuring business resilience. Book your place: icaew.com/annualconference

ICAEW works with caba to promote the mental health of chartered accountants and their families, producing articles, guides, webinars, videos and events that can provide support during these difficult times.