After a very strong start to 2024, during which the UK economy achieved its strongest growth for two years, things stalled again in April.
That the economy flatlined during April was no surprise, though, given a couple of factors.
One was the early timing of Easter, which will have led some consumer spending that would normally have taken place in April to be brought forward to March.
The other, more pertinent factor, was the weather.
The Office for National Statistics notes in its release that rainfall during April was 155% higher than the long-term average – making this the wettest April in more than a decade.
The arrival of Storm Kathleen at the end of the first week of April brought heavy rain to Scotland, Wales, parts of Northern Ireland and the West Country. In some parts of the country, things were even worse, with Edinburgh experiencing its second wettest April in 188 years. The last couple of weeks of April were also notably cooler than usual.
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That all appears to have had a bearing on a wide range of sectors in the economy, including retail, construction – which was particularly afflicted by high winds – and pubs, restaurants and cafes.
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The good news for the prime minister, such as it is, is that during the three months to the end of April, the economy grew by 0.7%. That represents a modest degree of momentum being carried forward from the first three months of the year and is still a pretty reasonable clip given the recent past.
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The better news is that things will probably have picked up in May. Survey data for May, most notably the forward-looking purchasing managers index (PMI) survey, suggests that the services sector – which makes up just over three quarters of UK economic activity – continued to expand during the month while manufacturing looks set to have returned to growth as well.
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1:44
UK economy flatlines in April
The PMI reading for May for manufacturing was the best since July 2022. Other measures of activity pointing to stronger growth during May include the data published by the British Retail Consortium, which pointed to a month-on-month increase in retail sales, helped by solid trading over the first Bank Holiday weekend of the month.
That should be no surprise: the headline rate of inflation is falling – albeit not sufficiently rapidly to convince the Bank of England to lower interest rates yet – while the latest reductions in national insurance will have shown up in pay packets at the end of April and may have served to inject a little more confidence among consumers. At the same time, as shown by the wages data published on Tuesday this week, average earnings continue to grow more strongly than the headline rate of inflation.
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12:28
Frazer: Economy has turned a corner
Add to that the expected boost to the economy from the European football championships and the Olympic Games and consumer spending ought to continue growing during June and July. Manufacturing, meanwhile, also looks set to continue its recent pick-up in activity as the UK’s main trading partners in Europe and the United States also see a recovery in demand.
As Sanjay Raja, chief UK economist at Deutsche Bank, put it in a note to clients this morning: “The flat April print will likely be temporary. And moreover, we continue to see GDP maintaining its upward momentum through the rest of the year. Our updated models point to GDP growth of 0.3-0.4% quarter on quarter in the second quarter of 2024.
“To be sure, a cyclical recovery is underway. A firming in real disposable incomes will likely give way to firming household consumption.”
Mr Raja thinks the economy will grow by 0.8% this year.
Meanwhile, an interest rate cut from the Bank of England is coming. It is possible, given the uptick in unemployment during the three months to the end of April, that the Bank of England might have been tempted to follow the lead of the European Central Bank and cut interest rates next week were it not for the general election.
As it is, a rate cut in August now looks highly likely.
All of this should continue to keep growth ticking over during the summer and into the autumn.
It all makes Rishi Sunak’s decision to go to the country early increasingly peculiar.
The UK economy will grow more than previously thought, according to the International Monetary Fund (IMF), which has upgraded its latest forecast.
It also said the Bank of England should “continue to ease monetary policy gradually”, indicating it expected further reductions in interest rates.
But it warned trade tensions linked to US tariff plans will reduce UK economic growth next year.
The Washington-based UN financial agency said the UK economy will expand 1.2% this year and “gain momentum next year”.
The upgrade in forecasts, however, is slight, up from an expected 1.1% announced in April as the world reeled from the global trade war sparked by US President Donald Trump’s tariffs.
That April figure was a 0.5% downgrade from the projected 1.6% growth for 2025 the IMF foresaw in January and the 1.5% forecast issued in October.
It means the IMF expects the UK economy to grow less this year than it forecast in October and January.
This anticipated lower growth is largely due to tariffs – taxes on goods imported to the United States – and the uncertainty caused by shifting trade policy in the US, the world’s largest economy.
While many tariffs have been paused until 8 July, it’s unclear if deals will be in place by then and if pauses may be extended.
The effect of this has been quantified as a 0.3 percentage points lower growth by 2026 in the UK, the IMF said.
The organisation held its prediction that the UK economy will grow by 1.4% in 2026.
“The forecast assumes that global trade tensions lower the level of UK GDP by 0.3% by 2026, due to persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK,” it said.
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Trump’s tariffs: What you need to know
It comes despite the UK having agreed a deal with the Trump administration to circumvent the 25% tariffs on cars and metals.
The IMF also cautioned that “weak productivity continues to weigh on medium-term growth prospects”.
Lower productivity has been an issue since the global financial crash of 2008-2009, but has been caused by “chronic under-investment”, low private sector research and development, limited access to finance for businesses to expand, skill gaps, and a “deterioration in health outcomes”, it said.
Interest rates
Interest rates “should” continue to come down, making borrowing cheaper, though the IMF acknowledged rate-setters at the Bank of England now have a “more complex” job due to the recent rise in inflation and “fragile” growth.
The author of the report on the UK, Luc Eyraud, said the IMF expected the Bank to cut interest rates by 0.25 percentage points every three months until they reach a level of around 3%, down from the current 4.25%.
Praise was given to the UK government as the IMF said “fiscal plans strike a good balance between supporting growth and safeguarding fiscal sustainability”.
“After a slowdown in the second half of 2024, an economic recovery is under way,” the IMF said.
Global factors – “weaker export performance in the challenging global environment” – are blamed for the slowdown last year.
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“The UK was the fastest growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast,” she said.
“We’re getting results for working people through our plan for change – with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the national living wage, and wages beating inflation by £1,000 over the past year.”
The government is considering getting rid of the two-child benefit cap first brought in by the Conservatives.
The policy has caused considerable consternation within the Labour Party, with a growing number of MPs calling to scrap it and ministers so far refusing to.
We look at what the cap is and the controversy over it.
What is the two-child benefit cap?
Since 2017, parents have only been able to claim child tax credit and universal credit for their first two children, if they were born after April 2017.
An exception is made for children born as a result of rape.
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Child benefit reform ‘not off the table’
Who introduced it?
Then work and pensions secretary Iain Duncan Smith first proposed the policy in 2012 under the Conservative-Liberal Democrat coalition government.
It was not until 2015 that then chancellor George Osborne announced a cap would be introduced from the 2017/2018 financial year.
The coalition said it made the system fairer for taxpayers and ensured households on benefits faced the same financial choices around having children as those not on benefits.
Image: David Cameron’s government introduced the cap, though he was out of office by the time it came in
What is Labour’s position on the cap?
The party has long been divided over the issue, with Sir Keir Starmer ruling out scrapping the cap in 2023.
He then said Labour wanted to remove it, but only when fiscal conditions allowed.
Following Labour’s landslide victory last July, the prime minister refused to bow to pressure within his party, and suspended seven MPs for six months for voting with the SNP to scrap the cap.
The publication of Labour’s child poverty strategy was delayed from the spring to autumn, fuelling speculation the government wants to use the next budget to scrap the cap.
Then the education secretary told Sky News on 27 May lifting the cap is “not off the table” – and “it’s certainly something that we’re considering”.
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Why did Labour delay their child poverty strategy?
How many children does the cap affect?
Government figures show one in nine children (1.6m) are impacted by the two-child limit.
In the first three months Labour were in power, 10,000 children were pulled into poverty by the cap, the Child Poverty Action Group found.
In May, it said another 109 children are pulled into poverty each day by the limit, adding to the 4.5 million already in poverty.
The Resolution Foundation said the cap would increase the number of children in poverty to 4.8 million by the next election in 2029-30.
Torsten Bell, the foundation’s former chief executive and now a Labour Treasury minister, said scrapping the cap would lift 470,000 children out of poverty.
Image: Torsten Bell has warned against keeping the cap. Pic: Dimitris Legakis/Athena Pictures/Shutterstock
How much would lifting the cap cost the taxpayer?
The cap means for every subsequent child after the first two, families cannot claim benefits worth £3,455 a year, according to the Institute for Government.
It estimates removing the limit would cost the government about £3.4bn a year – equal to roughly 3% of the total working-age benefit budget.
It is also approximately the same cost as freezing fuel duties for the next parliament.
Research has found the indirect fiscal impacts of lifting the cap could be higher, as some data shows investing in young children can pay for itself by causing better outcomes for them later in life.
Donald Trump says he will delay the imposition of 50% tariffs on goods entering the United States from the European Union until July, as the two sides attempt to negotiate a trade deal.
It comes after the president of the European Commission, Ursula von der Leyen, said in a post on social media site X that she had spoken to Mr Trump and expressed that they needed until 9 July to “reach a good deal”.
But Mr Trump has now said that date has been put back to 9 July to allow more time for negotiations with the 27-member bloc, with the phone call appearing to smooth over tensions for now at least.
Speaking on Sunday before boarding Air Force One for Washington DC, Mr Trump told reporters that he had spoken to Ms Von der Leyen and she “wants to get down to serious negotiations” and she vowed to “rapidly get together and see if we can work something out”.
The US president, in comments on his Truth Social platform, had reignited fears last Friday of a trade war between the two powers when he said talks were “going nowhere” and the bloc was “very difficult to deal with”.
Mr Trump told the media in Morristown, New Jersey, on Sunday that Ms Von der Leyen “just called me… and she asked for an extension in the June 1st date. And she said she wants to get down to serious negotiation”.
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“We had a very nice call and I agreed to move it. I believe July 9th would be the date. That was the date she requested. She said we will rapidly get together and see if we can work something out,” the US president added.
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12 May: US and China reach agreement on tariffs
Much of his most incendiary rhetoric on trade has been directed at Brussels, though, even going as far as to claim the EU was created to rip the US off.
Responding to his 50% tariff threat, EU trade chief Maros Sefcovic said: “EU-US trade is unmatched and must be guided by mutual respect, not threats.