UK economy grows by 0.4% in May; households face £94 water bill increase over next five years | Business

The UK economy springs back into life – it is faring much better so far in 2024 after a technical recession last year.

James Smith, developed markets economist at ING, said:

The result is that overall second-quarter GDP is on track to rise by 0.5-0.6% after 0.7% growth in the first quarter. We’re sceptical that these sort of growth figures can be sustained into the second half of the year, but we expect growth to remain reasonable nevertheless. One important factor is that the impact of past rate hikes has largely taken its course now; we estimate that 80% of the mortgage squeeze is behind us.

Does this change the story for the Bank of England? Probably not. Policymakers are still almost exclusively focused on services inflation, and it’s the one remaining release of this data that will determine whether the Bank can cut rates in August. Bank of England chief economist Huw Pill, perhaps unsurprisingly, refused to be drawn on what he thought in comments made yesterday.

But barring any big surprises in those inflation numbers, we think the Bank’s preference will be to start cutting rates and we expect three cuts in total this year.

Another upside surprise for UK GDP in May means that second-quarter growth is likely to be close to the first quarter’s strong expansion, despite drags from the early Easter and strikes in the health sector. “The recovery has clearly built some strong momentum in the first half,” said the EY Item Club, which uses the Treasury’s forecasting model.

It expects GDP to continue to grow at a decent pace in the second half, with consumers central to the story. Further solid gains in household spending power look likely, and if consumers adopt a less cautious approach, in line with recent household survey results, we can expect a strong pickup in consumer spending growth.

Peter Arnold, EY UK chief economist, said:

Four days of strike action in the healthcare sector at the end of June will have weighed on output last month. But even allowing for that factor, GDP is likely to have grown by at least 0.5% quarter-on-quarter in Q2. Indeed, there’s a realistic possibility that Q2 could have matched the 0.7% growth achieved in Q1, so it’s clear that the recovery has built some strong momentum.

The EY ITEM Club’s expectation that GDP continues to grow at a decent pace in H2 is founded mostly on optimism about consumer prospects. Lower inflation and still strong pay growth should combine to deliver further solid improvements in household spending power. Thus far, strong real income growth has only translated into a tepid recovery in spending as consumers have remained cautious. But there are signs from consumer surveys that the mood is changing, and the EY Item Club is optimistic that further real income gains will translate into a more meaningful pickup in spending growth in H2.

Simon French, chief economist and head of research at Panmure Liberum, said:

Here is our full story on water bills.

Back to the UK economy returning to growth in May, which is a boon for Keir Starmer’s government.

Sanjay Raja, chief UK economist of Deutsche Bank, noted that GDP surprised to the upside yet again, expanding by 0.4% month on month, driven by stronger services activity and construction output.

While the warmest May on record may have helped activity in the services and construction sectors, UK GDP is now undeniably picking up steam. The short-lived recession is now very much behind us. It’s now likely that Q2 growth could come close to the mark set in Q1 (our current nowcast models point to a 0.6% quarter-on-quarter reading with risks skewed to the upside). Equally, upside risks to our 2024 growth projection of 0.8% are also now crystallising.

This should be a boon for the new Labour government with growth now likely to outstrip the OBR’s 2024 GDP forecasts, partially offsetting some of the projected increase in interest rate costs. We will update our growth projections soon.

During the general election, the Liberal Democrats called for Ofwat to be abolished and a new water regulator to be established with greater powers.

Today, the Lib Dems are calling on Ofwat use its existing powers to crack down on large water bill rises. The party is also calling on the government to implement a ban on water company executive bonuses until discharges and leaks end.

The Lib Dems’ environment spokesperson Tim Farron said:

Any insulting price hikes by water companies must be blocked.

It is a national scandal that these disgraced firms are demanding more money from families and pensioners in a cost of living crisis, all whilst dumping raw sewage into our rivers.

After years of Conservative Ministers letting these shameful polluters get away with it, we now need tough action, starting with a ban on bonuses and a block on large bill hikes.

Communities spoke loudly at the election, demanding an end to the sewage scandal and water firms stuffing their pockets with bonuses and dividends. The government and regulator must listen to the country.

In return for being able to increase their bills, water companies must invest in the following, the regulator said:

Improving the environment

• Delivering more than 2,500 projects to reduce spills from storm overflows

• Upgrading over 1,500 wastewater treatment works

• Improving or protecting over 15,000km of rivers across England and Wales

• Expanding use of nature-based solutions – with £2bn of green schemes proposed

• Putting the sector on track to meet net zero emissions by 2050

Improving service

• Improving drinking water quality – targeting 21% fewer contacts received by water companies

• Stretching targets on reducing sewer flooding

• Better customer service incentives – companies only rewarded for good customer service compared to other sectors

Protecting our water and wastewater system

• A major expansion in new water assets, including nine new reservoirs and progressing seven large-scale water transfer projects

• Delivering 425 million extra litres of water supply per day by 2030

• Getting leakage down by a further 13% – to the lowest level since privatisation

• The biggest smart meter rollout to date, with 10 million to be delivered

• Tripling the rate of replacing water mains

The water regulator said companies should triple investment in new infrastructure and resources compared to 2020-25, to improve the environment, resilience, and service – from £11bn to £35bn. Nearly 90% of this investment is needed to meet legal requirements. Ofwat added:

Companies have proposed increased support for those struggling to pay, with an estimated 1.4 million more customers to pay reduced tariffs.

The increases in average water bills range from £66 at Anglian Water over the next five years, £99 at Thames Water, £107 at Yorkshire Water and £199 at Southern Water.

Despite the increases, water bills bills are on average £44 per year lower than what companies proposed, Ofwat said in its draft determinations for the water industry.

This is mainly because we have challenged companies’ view of what they need to spend, and because some companies based their plans on an investor return above the level we think is fair.

Introduction: UK economy grows by 0.4% in May; households face £94 water bill increase over next five years