The UK economy experienced a modest growth in May, expanding by 0.1 per cent after contracting in the previous month. This development provides a slight boost to the incoming prime minister as he prepares to take office. The monthly growth figure aligns with City forecasts, offering a cautious optimism for the economy.
On a three-monthly measure, gross domestic product rose by 0.7 per cent, surpassing projections of 0.5 per cent but slowing from 0.8 per cent in the previous three-month period. The economy had expanded by 0.3 per cent in March, indicating a varied growth pattern throughout the year.
For small business owners, the sectoral breakdown of growth is crucial. The services sector, where most of Britain's small and medium-sized enterprises (SMEs) operate, drove the growth, with services output rising by 0.3 per cent in May. This rebound followed a 0.1 per cent fall in April, with information and communications technology, science and research, and professional services performing well.
However, the picture is less positive in other sectors. Output in production contracted by 0.5 per cent in May, and construction fell by 0.8 per cent. These declines will likely affect builders, manufacturers, and the supply chains of smaller firms that depend on them.
The timing of these economic developments is challenging for the incoming prime minister, who will have to navigate a slowing economy hit by rising energy prices. These price increases have already pushed up costs for firms across the country, squeezing SME margins.
Forecasters expect annual GDP to expand by 0.9 to 1.1 per cent this year, down from 1.4 per cent last year. This economic backdrop will influence the prime minister's decisions on tax and spending, with some suggesting "room for movement" on tax and potential business rates cuts for certain sectors.
Economists warn that the weakness in growth is likely to continue into the third quarter, with volatile energy prices, higher inflation, and fragile public finances contributing to a stagflationary economy. The new prime minister will have just under three years to address this tough economic situation.
This economic outlook may concern SME owners, with many already expressing fears about the impact of the new prime minister's policies on their businesses. A slow-growing economy with rising inflation leaves little room for tax rises or spending increases, adding to the uncertainty.
For now, business owners are advised to adopt a cautious and pragmatic approach. While growth has returned, it is fragile and driven primarily by services firms. The impact of the new government's policies on businesses will become clearer soon, making the autumn Budget a significant event.
