Growth Arrives at the Wrong Moment

1. The economy leads the G7 at the wrong time

The UK grew again in May. Real GDP rose 0.1% on the month, reversing April's 0.1% contraction, and output over the three months to May was 0.7% higher, easing only slightly from the previous reading. Set against the same month a year earlier, the economy was about 1.3% larger. That is enough to put Britain at or near the top of the G7 growth table, running at roughly double the pace the Bank of England believes it can sustain without adding to inflation.

The composition is less flattering than the headline. Services did the work, up 0.3%, while production fell 0.5% and construction 0.8%. Manufacturing output jumped to a 21-month high in June, but much of that looked like firms building stock ahead of expected price rises rather than a durable pickup in demand.

The read: growth that would be welcome in a calmer year is awkward now. An economy running above trend, with inflation already above target, is exactly the backdrop that keeps a rate cut off the table and a rate rise on it.

2. The labour market cools underneath

The jobs numbers told the opposite story. The unemployment rate held at 4.9%, but the detail pointed down. Payrolled employees were roughly 119,000 lower than a year earlier, and job vacancies fell to about 707,000, the lowest since early 2021. Wage growth is fading too, with regular pay up 3.4% over the year and barely positive once inflation is stripped out.

For a committee that spent two years worried about pay feeding prices, a cooling labour market is the reassurance it has been waiting for. It is also the clearest sign that the strong growth figures may be describing the recent past more than the months ahead. Activity data looks backward. Vacancies and payrolls look forward, and both have turned.

The read: the Bank now has one gauge telling it the economy is too hot and another telling it the heat is coming out. Regular pay growth of 3.4% and falling is not the stuff of a wage-price spiral.

3. The gilt market frames July 30

While the data pulled in two directions, the bond market kept its own counsel. Long-dated gilt yields stayed under pressure, with the 30-year near its highest since 1998 and the UK carrying the steepest government borrowing costs in the G7. That leaves the Chancellor with a thin fiscal buffer and little room to respond if growth softens later in the year.

All of it points to July 30, when the next rate decision and a fresh Monetary Policy Report land together. In June the committee split 7 to 2, with two members already voting to raise Bank Rate to 4%. Above-trend growth, and an inflation forecast the Governor has said could reach 3.3% before the year is out, make a quiet, unanimous hold harder to deliver.

The read: sterling and gilts are trading the argument inside the committee, not the line in the statement. With the data genuinely mixed, the vote split will carry more information than the headline rate.

The week ahead

• June CPI, July 22: the first read on whether inflation is turning up toward the path above 3% the Bank now fears.
• Flash PMIs, July 24: a timely gauge of whether private-sector output is holding up or following the leading indicators lower.
• July 30 MPC and Monetary Policy Report: the decision, the vote split, and the Bank's new forecasts arrive together. The most important UK date of the summer.