ONS GDP data: Economy grows 0.5% in May despite deepening cost-of-living crisis

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“A GDP rise of 0.5% in May was slightly above the flat growth expected, showing the economy is holding up despite the challenges posed by the cost-of-living crisis and rampant inflation.

“The Bank of England has predicted that GDP will contract in the April-June quarter, with many analysts hinting at the risk of recession later this year. However, the slight rise in output in May might dampen those expectations despite some companies already bracing for an economic downturn as spending slows and costs soar.

“The negative outlook comes at a perilous time for the UK economy, with the Government embroiled in a leadership battle following Boris Johnson’s recent resignation and runaway inflation deepening an already painful cost-of-living crisis.

"The widely held expectation is that food, fuel and energy costs will only escalate further as the war in Ukraine continues and supply chain disruption persists. It means Boris Johnson’s successor in Downing Street could start their term in the middle of a recession and just a month before inflation hits a fresh high of more than 11% when the energy price cap set by Ofgem is expected to top £3,000 in October.

“For consumers already worried about paying the bills, now would be the right time to review their expenditure and draw up a budget to ensure their finances survive the great financial squeeze.

“Big ticket items such as holidays abroad, new car purchases or white goods should ideally be put on hold to give households breathing space to assess how heavily their finances will be hit by escalating costs.

“Even higher earners, who may not have considered a budget in the past, might want to review their spending behaviour to ensure they can continue to pay all their bills on time and still hit their saving and investment goals.

“Yes, there might be some respite for the most vulnerable households this month, after the threshold at which National Insurance contributions kick in was raised to £12,570, saving millions of households up to £330 a year. Eight million vulnerable households will also benefit from the first of former Chancellor Rishi Sunak’s cost-of-living cash payments of £326 on July 14,

“There could also be further tax respite to come, depending on who wins the Tory leadership race. But for now, the cost-of-living crisis is expected to worsen before it gets better, straining some households to the max.

“The temperatures may be hitting record highs now but as the colder months descend in the Autumn, some households will face tough decisions around whether to prioritise spending on food or heating.

“Signs that consumers are already tightening their belt was evident in the latest UK retail sales data from the British Retail Consortium and KPMG, with the volume of sales falling for the third consecutive month in June at an annual rate of 1% - a pace of decline not seen since the height of the pandemic.

“Throw higher interest rates and lower savings rates into the mix and the winter months look increasingly bleak with Christmas potentially far from the jolly post-pandemic, free-for-all many were hoping for.

“The lucky ones are those that still have their savings pots built up during the pandemic to fall back on. For others, who may have already raided any spare money, the urgency to slash expenditure has never been higher to ensure they are adequately prepared for the storm of challenges ahead.

"A glimmer of hope in all of this is that good financial habits instilled now could last a lifetime and ensure household finances remain robust long after the cost-of-living crisis has ended.”