The UK economy expanded 0.4% in May, which is better-than-anticipated growth. It’s an auspicious sign for a new government headed by Prime Minister Keir Starmer, but it raises doubts about the action that should be taken by the Bank of England in terms of reducing interest rates soon. Off late, the improvement in the performance of the economy has resulted in a stronger outlook for the UK’s economic recovery.

British economy grows surprisingly fast in May, giving Prime Minister Keir Starmer’s new government a decent sendoff. Economic output increased by 0.4% in May, much stronger than in April, when it did not grow at all, the Office for National Statistics said. Economists had forecast growth of 0.2%.

This stronger-than-anticipated growth could make the Bank of England think again about an interest rate cut sooner rather than later. The BoE was seen announcing a possible rate cut on 1 August, but the recent economic performance might delay this move as some policymakers have pointed to the strong domestic price pressures.

The odds of a rate cut in the futures markets three weeks down the line slipped below 50% from just above. Of late, there has been a broad-based improvement in economic output with growing services, manufacturing, and construction industries. Among them, construction—especially house-building—expanded 1.9%.

This economic growth is very much an incoming success for the new Labour government. The Keir Starmer administration seeks to drive the fastest growth among advanced economies in the Group of Seven. Ashley Webb, an economist with Capital Economics, said, “The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate.”

The economy has advanced 1.5% since the start of the year—its best five months since early 2017 outside the recovery from the COVID-19 pandemic. On Thursday, Goldman Sachs pushed up its 2024 growth projection by a tenth of a percentage point to 1.2%.

Long term, however, there is still much to be concerned about. The economy is just 2.7 per cent larger than it was pre-pandemic at the end of 2019. Only Germany has performed worse since among the G7 countries.

The economy grew 0.9% in the March-May quarter, much stronger than expected at 0.7%. The Bank of England’s estimate for second-quarter growth was 0.5%, and the figures indicate this might be too conservative. Suren Thiru, head of economics at ICAEW, said: “These GDP figures may make an August rate cut less likely. They provide confidence in the UK’s economic recovery, making it possible to delay loosening monetary policy.”

Separate figures from the Office for National Statistics showed Britain’s overall trade deficit, excluding precious metals, fell to 3.2 billion pounds in May from 4.7 billion in April. However, the ONS said that at 11.0 billion pounds, May’s exports of goods to the European Union were the lowest since January, when new rules came into effect at British borders following the end of the Brexit transition period – before that month, exports were last at this level in the late 1990s.

Though PM Keir Starmer has repeatedly talked of reducing trade barriers with the EU, he has refused to return to the single market of the EU. The new government will keep its focus on economic growth and trade relations in the view of upcoming quarters.

The result is that the UK’s better-than-expected economic growth in May is a good omen for the new Labour government. It runs the risk of interest rate cuts, which can be expected at the Bank of England. That dull historical milestone goes a long way to underline just what a complex balancing act it is to manage recovery and inflation.