UK economy claws back some growth as Burnham prepares to take power

By William Schomberg and David Milliken

LONDON, July 16 (Reuters) - Britain's economy eked out minimal growth in May as the services industry expanded but other sectors shrank, suggesting fragile confidence among businesses against the backdrop of the Iran war and a change of prime minister at home.

Gross domestic product expanded by 0.1% in May, in line with the median forecast in a Reuters poll of economists and reversing a 0.1% fall in April, official data showed on Thursday.

Services output expanded by 0.3% on the month but industrial production and construction both contracted, falling by 0.5% and 0.8% respectively.

Figures showing robust overall economic growth of 0.7% in the three months to May offered a positive send-off to finance minister Rachel Reeves before her expected replacement next week under new prime minister Andy Burnham.

Reeves' job appears likely to go to Shabana Mahmood, currently Britain's interior minister, who is set to be named finance minister next week by Burnham, according to news reports on Wednesday including in the Financial Times.

ECONOMY GROWING NEAR FASTEST PACE IN 2 YEARS

An upwardly revised growth figure of 0.8% in the three months to April represented the fastest expansion since the Labour Party came to power and matched the rate achieved under Reeves' Conservative predecessor Jeremy Hunt in May 2024.

Compared with a year earlier, output in May was 1.3% higher, the biggest annual rise in 10 months.

However, the outlook for the economy remains darkened by the shadow of the conflict in the Gulf and uncertainty over the latest change of political leadership at home — Britain's seventh in the past 10 years.

On Wednesday, the Organisation for Economic Co-operation and Development said it expected British GDP to grow by only 0.9% this year and 1.1% in 2027, although the forecast for 2026 was the strongest for the major European economies.

Neil Birrell, chief investment officer at fund management firm Premier Miton, said uncertainty around economic policy in Burnham's government was likely to weigh on growth in the months ahead.

"It's unlikely businesses and individuals will be actively hiring or spending ahead of getting policy details," Birrell said. "All that, when the starting point is an economy that is barely growing."

Sanjay Raja, chief UK economist at Deutsche Bank, saw more positive details in the GDP data and said Britain was likely to remain near the top of the Group of Seven growth table in the April-to-June period.

"In short, PM Starmer hands over the economy to his successor on a much better footing," he said.

The OECD urged Burnham, who is due to replace Keir Starmer as prime minister on Monday, to keep the government's budget discipline, tackle high pension spending and address soaring energy prices to speed up the economy.

The Office for National Statistics, which published Thursday's figures, said the growth in services over the three months to May was driven by computer programming and advertising alongside the often-volatile pharmaceutical industry.

In May, growth in research and development in medical sciences was particularly strong, the statistics agency said.

Britain's goods trade deficit narrowed in May to its smallest since January at £18.7 billion, a bigger drop than economists had expected from April's £24.6 billion.

Imports of refined oil from Saudi Arabia, Kuwait and Qatar — all affected by the closure of the Strait of Hormuz — fell to zero in May, while imports from the United States had more than tripled since February and imports from Belgium and the Netherlands had nearly doubled, the ONS said.

(Writing by William Schomberg; Editing by Muvija M and Alexandra Hudson)