The UK economy contracted by 0.1% in May, according to the Office for National Statistics.
This was a better figure than consensus forecasts of a 0.3% fall, with the extra bank holiday for the coronation of King Charles seen as a likely drag on economic activity.
Underneath the headline number, the industrial sector contracted 0.6%, construction dipped 0.2%, while services activity was flat on the previous month.
The new data suggests that the economy is flatlining under the weight of higher interest rates. There has been no growth in the three months to May 2023 when compared with the three months to February 2023, according to the ONS.
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Whether a stalling economy will turn into a recession is far from clear at this stage however.
The pound rose 0.5% against the dollar to $1.30 as markets digested the update.
Victoria Scholar, head of investment at Interactive Investor, commented: “The stronger-than-expected GDP figure echoes the Bank of England’s comments yesterday that the UK economy is proving to be resilient to the rising rate environment, so far managing to stave off a recession.
“Perhaps the latest data could embolden the central bank to go further in terms of rate hikes to try to curtail the lingering inflationary pressures. However Prime Minister Rishi Sunak’s new year pledges for the economy look increasingly difficult to achieve given the macroeconomic headwinds with sluggish GDP and rampant inflation.”
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Nicholas Hyett, investment manager at Wealth Club, said: “May’s GDP numbers paint a confused picture of the state of the economy. While the economy shrank modestly in May, that could be down to the extra bank holiday for the Coronation as well as industrial action across the health, rail and education sectors. If true that would suggest the underlying picture is of an economy that remains strong, despite the Bank of England’s attempts to cool activity with higher interest rates.
“Longer term though, there are signs the economy could be running out of gas. The housing market seems to be slowing, with less construction activity in housebuilding, and recruitment is seeing weakness too – potential canaries in the coal mine that suggest the economy has reached a turning point and is sliding from growth to contraction.”
