Economic indicators confirm the UK has emerged from its recent recession, displaying growth and resilience. Strong performances in the service and manufacturing sectors have driven this recovery, marking one of the nation's briefest downturns. With falling inflation, hopes for a summer interest rate cut are rising. However, underlying economic challenges persist, suggesting a complex path ahead for sustained growth and stability.

UK comfortably exits recession

Official figures confirmed that the UK exited recession, with the economy growing by 0.6% in the first quarter of 2024, the fastest rate since Q4 2021. This marks one of the shortest and shallowest downturns on record, with the UK in recession for only two quarters and peak-to-trough decline of just 0.4% (see Chart 1). However, despite the UK’s escape from recession, the longer-term trend remains anaemic with UK GDP estimated to have increased by just 0.2% in annual terms in Q1 2024 – well below the historic average of 2.3%. 

The service sector was a key driver of this rebound in GDP, growing by 0.7% in Q1. Retail, public transport and haulage, and health firms all performed well in the quarter. Industrial output is estimated to have increased by 0.8% in Q1, largely reflecting a 1.4% rise in manufacturing output. In contrast, construction output fell by 0.9% in Q1 as wet weather dampened activity.

UK inflation drops to three-year low

UK CPI inflation stood at 2.3% in April 2024, the lowest rate since July 2021 and down sharply from 3.2% in March. However, this latest drop owed more to lower energy bills than a meaningful easing of underlying price pressures. Services inflation – a good indicator of domestic inflationary pressures – came in at 5.9% in April, well above the historic average of 4.1% and down only slightly from 6.0% in March (see Chart 2). The headline inflation rate is likely to drop below the Bank of England’s 2% target over the summer, once the 7% decline in Ofgem’s energy price cap lowers energy bills from July.

Bank of England moving closer to cutting rates

The Bank of England kept interest rates on hold for the sixth successive meeting – at 5.25% it’s a 16-year high. The Monetary Policy Committee (MPC) member voting split in favour of this outcome shifted to 7-2, from 8-1 at the last meeting, as a second MPC member voted for a rate cut. Another rate-setter voting to loosen policy suggests that the Bank of England is slowly pivoting towards interest rate cuts.

Jobs market still faltering

The UK unemployment rate rose to 4.3% in the first quarter of 2024, the highest rate since the spring of 2023 and up from 3.8% in the previous quarter. The UK economic inactivity rate – the proportion of people who are neither working nor looking for a job – rose to 22.1% in Q1 2024, from 21.9% in the final quarter of 2023, reflecting an increase in the number of people that were temporarily or long-term sick. Early HMRC data highlights the impact of April’s increase in the national living wage, with those sectors where pay levels are lowest typically seeing the bigger increases in pay growth (see Chart 3).

UK productivity falls

Despite the economy returning to growth, UK productivity – as measured by output per hour worked – fell by 0.3% in Q1 2024, following a 0.9% decline in Q4 2023. As a result, productivity in the UK is now only 1.7% above its 2019 level. Poor productivity is a key concern because it limits an economy’s ability to deliver sustainably high wages without stoking inflation. Over the past year, business services made the largest negative contribution to productivity growth, while the biggest upward contribution came from manufacturing.

Implications for accountants, business owners and the economy

Overall, these figures suggest that the UK’s strong exit from recession is a rather hollow victory because the big picture remains one of an economy struggling with stagnation, as high economic inactivity and poor productivity limits the UK’s growth potential.

UK economy – what to watch for this month

1. The next GDP figures, to be released on 12 June, could show a slowdown in GDP growth in April (from the 0.4% outturn in March), driven by renewed consumer caution to spend and amid higher unemployment and political uncertainty.
2. May’s inflation figures, to be published on 19 June, could see inflation return to the Bank of England’s 2% target for the first time since July 2021 as lower food prices add to the downward pressure on the headline rate.
3. Lingering concerns over inflationary pressures mean that an interest rate cut is unlikely at the MPC’s next announcement on 20 June. However, if more rate setters do vote to ease policy, this would suggest that a summer rate cut is still possible.

Links to support

For more insights, analysis and resources for organisations facing rising costs of doing business, visit ICAEW’s Cost of doing business hub.

ICAEW also 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.