Economic decline in April UK: Will the Bank of England take action?
UK's economy took a hit in April 2023, with GDP declining by 0.3% – the sharpest drop since October 2023. This contraction was mainly driven by a downturn in services and manufacturing sectors.
The services sector, responsible for about 80% of UK's economic output, faltered in April, registering a 0.4% drop. The professional, scientific, and technical activities subsector took a significant hit, plunging by 2.4%. This dip was primarily due to a 10.2% fall in legal activities, which could be attributed to changes in Stamp Duty Land Tax thresholds in England and Northern Ireland. This led homebuyers to bring forward purchases to March, causing a subsequent decline in related services in April. Advertising and market research also contributed negatively to GDP, with output decreasing by 3.4%. Conversely, growth in scientific research and development provided a partial offset.
Manufacturing production fell by 0.9% in April, adding to a 0.8% drop in the previous month. Overall industrial production contracted by 0.6%, coming in weaker than the 0.5% decline expected by analysts. Despite a rebound in construction output, the broader economy continued to falter. The number of payrolled employees fell by 109,000 in May, the sharpest drop since May 2020, and the unemployment rate ticked up to 4.6% in the three months to April.
The Bank of England is expected to leave interest rates unchanged at 4.25% at its upcoming meeting next week. However, traders have increased their bets on a rate cut in August as the economy shows signs of cooling. Overall, money markets are currently pricing two interest rate cuts of cumulative 50 basis points by the BoE this year.
The contraction in the services and manufacturing sectors renewed concerns over the UK economy's resilience, putting pressure on both the government and the Bank of England's policy stance. If economic conditions in 2023 resemble those of 2025, predicting the Bank of England's monetary policy response becomes more straightforward. In 2025, the Bank of England might respond to the economic slowdown by adjusting interest rates or implementing quantitative easing to stimulate growth and help the economy recover.
The contraction in the services sector, responsible for the majority of UK's economic output, was significant in April, with professional, scientific, and technical activities experiencing a 2.4% decline. Concurrently, the business sector, particularly manufacturing, showed a downturn, with production falling by 0.9% in April.
Pressure on both the government and the Bank of England's policy stance increases as the UK economy's resilience comes under renewed concern due to the contraction in services and manufacturing sectors. If economic conditions in 2023 resemble those of 2025, the Bank of England might respond to the economic slowdown by adjusting interest rates or implementing quantitative easing to stimulate growth and help the economy recover, similar to their actions in 2025.
