UK GDP edges up 0.1% in May amid Iran war shock

The UK economy expanded by 0.1% in May, defying expectations that the Iran conflict would trigger a sharper downturn. The modest rebound follows a 0.1% contraction in April and matches economist forecasts, suggesting the initial energy shock has not derailed growth entirely.

However, the headline figure masks significant divergence across sectors. Services output grew by 0.3%, heavily driven by a 5.1% surge in scientific research. This strength was counterbalanced by a 0.5% decline in production and a steeper 0.8% drop in construction.

The rolling three-month figure, which smooths out volatility, showed GDP up 0.7% through May. Liz McKeown, the ONS director of economic statistics, noted: "The economy recorded robust growth in the three months to May, though the pace eased slightly as the last two months showed a weaker picture."

For market participants, the uneven recovery fails to reassure. Suren Thiru, chief economist at the ICAEW, said: "This dishearteningly weak rebound is unlikely to ease anxiety over the UK’s economic health as the Iran conflict helped suppress activity in key sectors like construction and industrial production, despite a warm weather uplift to retail."

The critical implication for investors is the rapid erosion of fiscal headroom ahead of a political transition. Andy Burnham is expected to name a new cabinet on Monday, replacing departing chancellor Rachel Reeves with Shabana Mahmood. The Resolution Foundation estimates that more than half of the £23.6bn in fiscal headroom Reeves established in the spring statement has already been wiped out by the war.

This squeeze is set to intensify as oil prices have spiked again following the resumption of hostilities this week. The IMF recently upgraded its 2024 UK growth forecast to 1%, up 0.2 percentage points from its April estimate. A Treasury spokesperson pushed back against broader concerns over the outlook.

"We have the right economic plan which has put the UK in a much stronger position than two years ago with the fastest growth in the G7 in the first quarter and the OECD agreeing that we have restored stability," the spokesperson said. "We’re forecast to be the fastest growing European G7 economy this year and next, inflation is steady, and for the first time since 2004, we are forecast to borrow less this year than the G7 average."