The UK economy grew by 0.4 per cent in May, double the expected figure, driven by continued expansion in the services sector and a rebound in housebuilding.
The month-on-month rise followed zero growth in April, the Office for National Statistics said on Thursday, and exceeded a 0.2 per cent forecast for May by economists polled by Reuters.
Sterling rose 0.7 per cent against the dollar to $1.2941, its highest in almost a year, boosted by the UK GDP numbers and then lower than expected US inflation data.
The strong growth in May suggests the quarterly expansion might exceed the Bank of England's forecasts, potentially complicating its decision on whether to start cutting interest rates in August from their 16-year high of 5.25 per cent.
Traders in swaps markets remained evenly split on the chances of the BoE keeping rates on hold and cutting them at its August meeting.
The economic data brings the UK's annual GDP growth to 1.4 per cent, higher than the 1.2 per cent economists had forecast.
"Stronger services consumption raises the risk that service CPI inflation will remain too strong for the Bank of England to cut [interest rates]," said Tomasz Wieladek, chief European economist at T Rowe Price. "The data today makes a cut in August less likely. It is becoming more probable that the bank only cuts once this year."
Although recorded under the previous Conservative government, the data comes as a boost to Labour, which has declared growth its "national mission".
Chancellor Rachel Reeves said: "This week I have already taken the urgent action necessary to fix the foundations of our economy to rebuild Britain and make every part of Britain better off. A decade of national renewal has begun, and we are just getting started."
Ashley Webb, economist at Capital Economics, said: "The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate."
Webb said the rise in GDP in May was the fourth increase in the past five months, "which supports the idea that the dual drags on activity from higher interest rates and higher inflation are starting to fade".
Although recorded under the previous Conservative government, the data comes as a boost to Labour, which has declared growth its "national mission".
Chancellor Rachel Reeves said: "This week I have already taken the urgent action necessary to fix the foundations of our economy to rebuild Britain and make every part of Britain better off. A decade of national renewal has begun, and we are just getting started."
Ashley Webb, economist at Capital Economics, said: "The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate."
Webb said the rise in GDP in May was the fourth increase in the past five months, "which supports the idea that the dual drags on activity from higher interest rates and higher inflation are starting to fade".
The economy has largely stagnated over the past two years, reflecting the hit from the cost of living crisis. In the first quarter, GDP a head was still 1 per cent below the fourth quarter of 2019.
However, the economy has bounced back from last year's technical recession. Strong growth of 0.7 per cent in the first quarter was the fastest expansion in the G7 group of advanced economies.
Growth in May was driven by the services sector, which expanded 0.3 per cent in May and registered the fastest growth over three months since December 2021, when Covid-19 restrictions were still in place.
Manufacturing production was up 0.4 per cent in May and construction rebounded 1.9 per cent following a sharp contraction in April, when wet weather hit activity.
Rainfall in April was 155 per cent of the long-term average for the month while May was the warmest since records began in 1884, according to the Met Office.
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