UK GDP saw unexpected growth of 0.1% in May, following a contraction in April, the latest ONS figures show.
GDP grew by 0.7% in the three months to May, better than the 0.5% expected, and the three months to April was revised up to 0.8%.
Services output of 0.3% in May was a key driver of the growth, though it was offset by falls in production and construction.
Some industry experts believe that stronger growth means more hawkish members of the Monetary Policy Committee have greater scope to argue that the economy can withstand rates remaining higher for longer.
Others believe that with the resumption of hostilities in West Asia, stronger than expected economic growth could tilt the scale towards a rate hike in the next few months.
Lindsay James, investment strategist at Quilter, commented: “Despite fears that momentum in the UK economy had faded, it has surprised with growth of 0.1% in May, reversing the 0.1% fall seen in April.
“The conflict in the Middle East has already left a significant mark on the economy, and while today’s GDP print is better than expected, there is still a risk that the fallout is far from over. While the ceasefire announced earlier this summer briefly improved sentiment, renewed tensions and ongoing disruption have exposed how fragile the situation remains.
"Households are also yet to feel the full impact. While energy bills have risen following the latest increase in the price cap, higher food prices are still feeding through and will add further pressure to already stretched household budgets.
"Meanwhile, the UK is braced for a new prime minister, and markets will be watching closely for any signals on Andy Burnham’s plans for spending, taxation and borrowing. What’s more, ongoing speculation over who will take the role of Chancellor is adding another layer of uncertainty for businesses and risks weighing further on confidence.
"All of this leaves the Bank of England with a tricky path to navigate. Growth is still relatively weak, and inflation risks remain very much alive, particularly with energy and commodity markets still vulnerable to further geopolitical shocks."
George Lagarias, chief economist at Forvis Mazars, said: "The British economy is once again proving its resilience and pushing back on forecasts for a Mid-year recession. While month-on-month economic growth for May was anaemic, just 0.1%, it still beat expectations for 0%. Meanwhile, the three-month GDP growth was 0.7% with the previous number revised up by 0.1%. For the second straight three-month period, all parts of the economy had a positive contribution, with services taking the lead.
"Having said that, today’s number doesn’t help Bank of England doves. With the resumption of hostilities in the Middle East, stronger than expected economic growth could tilt the scale towards a rate hike in the next few months."
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, commented: “The UK economy grew in May, beating expectations and showing signs of resilience despite an uncertain geopolitical environment. While this is a positive, the broader picture still points to a fragile economy with higher energy costs continuing to weigh on businesses and consumers.
“Beneath the monthly figures, the services sector continues to do most of the heavy lifting, helping to keep the economy steady. Retail sales rebounded modestly as real pay continued to rise. This tailwind for consumption could fade if private sector wage growth slips below inflation in the months ahead. Construction remains a weak spot, with output falling and industry surveys still signalling subdued activity. Property sales, however, have shown signs of improvement, holding up better than expected in the face of higher mortgage rates.
“With momentum still proving difficult to sustain and the situation in Iran remaining uncertain, this reading highlights the economic challenge facing the next Prime Minister. They will inherit a difficult hand as inflation remains above-target and the Iran conflict continues to dampen growth.”
Derrick Dunne, CEO of YOU Asset Management, added: “It is encouraging to see the UK economy grow in May while continuing to expand over the three months leading up to it.
“However, there is an import caveat. These figures lag, showing where the economy stood before the latest re-escalation between the US and Iran, which has once again put pressure on oil prices and disrupted shipping through the Strait of Hormuz.
“Higher energy costs could weigh on household spending and business margins in the months ahead, but today’s reading suggests the economy was still showing resilience before the latest escalation added a fresh threat to the outlook.
“Stronger growth means for the Bank of England, the more hawkish members of the Monetary Policy Committee have greater scope to argue that the economy can withstand rates remaining higher for longer, particularly if the energy shock feeds into greater inflation this year.
“Yet policymakers should be wary of reacting too aggressively to what is still largely an external supply shock. Higher fuel and energy bills already act like a form of rate rise by diverting spending away from other parts of the economy.
“The real test will be whether this momentum can survive the renewed geopolitical disruption."
