The UK economy has been riding a wave of strong growth in the first half of 2024, buoyed by events including Taylor Swift’s tour and the Euros, sparking hopes of a sustained resurgence. Despite this recent uptick, challenges remain, including rising inflation, uneven job market signals, and a widening trade deficit. As the initial boost from these events fades, the resilience of the economy continues to be tested. Is this momentum built on solid ground, or could these underlying issues derail the recovery?

Economic resurgence unlikely to last

Official figures confirm that the UK economy grew by 0.6% in the second quarter of 2024, following growth of 0.7% in the previous quarter. This means that the UK will have been the fastest growing economy of any G7 country in the first half of this year. The service sector was the key driver of GDP growth in the second quarter with particularly strong output from the IT industry, legal services and scientific research firms. In contrast, output from manufacturing and construction firms fell over the same period. The current pace of economic growth is unlikely to be maintained in the second half of the year as weaker wage growth, high interest rates and persistent supply constraints limit output.

Inflation sweet spot passes

UK CPI inflation rose from 2.0% to 2.2% in July 2024, the first increase since December 2023. This uptick was largely driven by domestic energy costs, which fell by less in July 2024 than the fall in bills experienced a year ago. This rise in inflation signals the start of a period of price pressures rising – albeit moderately – with greater demand from a recovering economy and higher energy bills likely to keep inflation above the Bank of England’s 2% target until next year.

Encouragingly, several indicators suggest that underlying price pressures eased notably in July. Services inflation – a barometer of domestic inflationary pressures – slowed to 5.2% in July, the slowest rate since June 2022 and down sharply from 5.7% in June (see Chart 1). Similarly, core inflation – which strips out volatile costs such as food and fuel – came in at 3.3% in July, the lowest rate since September 2021 and down from 3.5% in June.

Mixed signals from UK jobs market

The UK’s unemployment rate dropped to 4.2% from 4.4% in the three months to June 2024, the first decline since the end of 2023. In contrast, the number of job vacancies – a good indicator of demand for workers – fell by 26,000 in the three months to July 2024, marking the 25th successive decline. Vacancies decreased in 10 of the 18 industry sectors tracked, suggesting that the slump in labour demand is more concentrated in certain parts of the economy. The largest decline in vacancies was in real estate activities (-13.5%). The largest growth in vacancies was in water supply, sewerage, waste and remediation activities (25.4%).

Productivity falls, despite growing economy

Although the UK economy grew in the second quarter, productivity – as measured by output per hour worked – fell by 0.1% in Q2 2024, compared to the same period last year. This decline was partly driven by the weakness in business investment which fell by 0.1% in Q2 2024 and is 1.1% below the level a year ago. Over the past year, the contributions to productivity growth came from only five sectors, led by manufacturing (see Chart 2). In contrast, the water supply industry was the biggest drag on productivity growth. Poor productivity is a key concern because it limits an economy’s ability to continue growing and deliver sustainably higher wages and living standards.

UK trade deficit widens

The UK’s trade balance (the difference between exports and imports) stood at a deficit of £13.3bn (excluding precious metals) in Q2 2024, an increase of £7.1bn on the previous quarter (see Chart 3). While UK exports increased by £4.5bn in the second quarter, this was more than offset by a £11.6bn rise in imports over the same period. Services exports grew by 2.8% in Q2, the fastest increase since Q1 2023, partly reflecting a strong pick-up within business services, tech and travel. Exports of goods rose by 1.3% over the same period. 

Implications for accountants, business owners and the economy

While these figures confirm an exceptionally strong first half of the year for the UK economy, this owes more to temporary momentum from the recent large falls in inflation and a boost from events like Euro 2024 than from a meaningful improvement in the UK’s underlying growth trajectory.

UK economy – what to watch for this month

1. Monthly GDP data to be released on 13 September should confirm that UK economic activity picked up in July, following zero growth in June.
2. The next inflation figures due out on 18 September are likely to show that inflation rose for the second successive month in August.
3. The next UK interest rate decision will be made on 19 September with rates more likely to remain on hold than lowered.

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