The UK economy returned to growth in May, expanding by 0.1 per cent after contracting the previous month, handing Andy Burnham the thinnest of economic cushions as he prepares to enter Downing Street next week.
The monthly figure, published by the Office for National Statistics, was in line with City forecasts. On the more reliable three-monthly measure, gross domestic product rose by 0.7 per cent, ahead of projections of 0.5 per cent but slowing from 0.8 per cent in the previous three-month period. The economy expanded by 0.3 per cent in March.
For small business owners, the detail matters more than the headline. The growth that does exist is being generated almost entirely by services, the sector in which most of Britain’s SMEs operate. Services output rose by 0.3 per cent in May, rebounding from a 0.1 per cent fall in April, with information and communications technology, science and research, and professional services among the best performers.
The picture elsewhere is bleaker. Output in production contracted by 0.5 per cent in May and construction fell by 0.8 per cent, Liz McKeown, the director of economic statistics at the ONS, said. For builders, manufacturers and the supply chains of smaller firms that depend on them, the second quarter has offered little comfort.
The timing is awkward for the incoming prime minister. The economy outperformed at the start of the year, registering quarterly growth of 0.6 per cent, but has slowed sharply since, hit by the rising energy prices that have already pushed up costs for firms across the country. As our coverage of March’s jump in inflation to 3.3 per cent set out, fuel and energy bills are squeezing SME margins in ways that are hard to hedge and harder to pass on.
Forecasters expect annual GDP to expand in the range of 0.9 to 1.1 per cent this year, down from 1.4 per cent last year. That is the backdrop against which Burnham, who has signalled “room for movement” on tax and pledged a business rates cut for pubs and high street firms, will have to make his sums add up.
Ben Caswell, the senior economist at the National Institute for Economic and Social Research, said the “weakness in growth [will] continue into the third quarter”.
He added: “With volatile energy prices, higher inflation on the horizon, and fragile public finances, the new PM inherits a stagflationary economy and will have just under three years to turn around a tough economic situation.”
That word, stagflationary, will land uncomfortably with the eight in ten SME owners who have already told researchers they fear what a Burnham premiership means for their business. A slow-growing economy with inflation on the way up leaves little room for the tax rises his critics expect, or the spending his supporters demand.
For now, the message for business owners is one of watchful pragmatism. Growth has returned, but only just, and it is services firms doing the heavy lifting. Whether the new government lightens their load or adds to it will become clear soon enough. The autumn Budget suddenly looks a long way off, and very close indeed.
