A surge in doctor visits has led to an unexpected jump in the UK's economic growth.

UK GDP exceeded expectations with growth of 0.5% in May

A surge in doctor visits and holiday bookings led to an unexpected jump in UK economic growth in May, offsetting continued weakness in store spending.

Gross domestic product rose by a remarkably robust 0.5% after a 0.2% decline in April, a figure that has been revised upwards, the Office for National Statistics said. Economists had forecast growth of 0.1%. 

As the economy shows resilience, money markets have raised rates on the pace of interest rate hikes by the Bank of England. Investors now expect the key rate to more than double to 2.75% by the end of the year.

There was "nothing to stop the Bank of England from continuing to raise interest rates over the summer," said Kitty Usher, chief economist at the Institute of Directors, adding that the data was "encouraging."

The result underscores the uncertain legacy awaiting contenders vying to replace Boris Johnson this fall. This increases the pressure on the government to find a solution to curb rising inflation and lower the cost of living that is putting pressure on consumer spending.

"It's always nice to see the economy grow, but I'm not complacent," said Chancellor of the Exchequer Nadhim Zahavi, one of the candidates aspiring to become prime minister. "I know people are worried, so we continue to support families and economic growth." 

"The UK economy performed significantly better than we expected in May, with all sectors seeing growth, including services, which benefited from rising health production. A modest contraction still looks likely in the second quarter – largely due to an additional bank holiday – but the details of the release should give the Bank of England some confidence that underlying growth is not collapsing. Our baseline scenario remains a 50 basis point rate hike in August."

--Ana Luis Andrade, Bloomberg Economics. Click on REACT.

Business groups including the CBI and the British Chamber of Commerce have expressed concern that the volatility of the economy is delaying investment and called on the government to do more to boost productivity and investment.

All sectors of the economy showed growth, with a 15 percent increase in general practitioner appointments and a surge in travel bookings for the summer contributing to the rebound in services.

"Health was the biggest driving force, and many more people saw GPs despite testing and tracking, and vaccination programs were winding down," said Darren Morgan, director of economic statistics at the ONS. 

Construction showed the seventh month of consecutive growth. Energy has helped boost industrial production as the UK has attracted imports of liquefied natural gas and exported supplies to Europe to offset the decline in Russian supplies. Production also rose.

However, there are signs that the decline in living standards is weighing on households. 

Consumer services, including hospitality and retail, fell 0.1%. People spent less in stores and on walks, with a 0.5% decline in retail and a 5.3% reduction in sports, entertainment and recreation in May.

Inflation is at a 40-year high, and wages are falling short of prices, raising the prospect of a deep drop in real incomes. The Bank of England forecasts a contraction in the second and fourth quarters of this year as consumer demand fluctuates, followed by two years of stagnation.

The fall in consumer services came a month after a significant increase in electricity bills and taxes. The government has provided some support to soften the blow to poor households. The wealthier people have almost £200 billion in excess savings to lean on.

Output is currently 1.7% above pre-pandemic levels. The economy will avoid contraction in the second quarter unless GDP contracts by more than 0.8% in June. 

However, last month there was an additional bank holiday for the Queen's anniversary. Previous similar events in 2002 and 2012 showed that output fell by about 2% on a monthly basis.

There was a surge in travel agency activity as families booked their summer vacations. Output in the tourism sector increased by 11% in a month as confidence in holiday bookings rose after the end of Covid restrictions. 

"Road carriers have also had a busy month, while travel agencies have handled well the pent-up demand for the summer holidays," Morgan said. "After several difficult months, there has been widespread growth in the manufacturing industry. Construction has also succeeded in housing construction and office renovations, driving growth."

The upcoming economic path may worsen. While official estimates now show that the country is likely to shy away from two consecutive quarters of contraction, economists are becoming increasingly pessimistic due to the surge in inflation.

A Bloomberg poll of analysts this week estimated the risk of a recession in the UK in the next 12 months at 45%, which is three times higher than the probability recorded in the survey in early 2022.

"The UK economy remains dangerously close to recession," said Suren Thiru, economic director at ICAEW, which represents chartered accountants. "Prolonged political uncertainty could ease economic conditions by stifling investment and increasing inflation, causing the value of the pound sterling to fall further."