The UK economy returns to growth in May, surpassing expectations as the British pound reaches a four-month high.

The British economy emerged from a mild recession in the first quarter of the year before flatlining in April. The nation's major services sector expanded by 0.3% in May, while output in production and construction rebounded from losses, gaining by 0.2% and 1.9%, respectively. Sterling was up 0.14% against the US dollar at $1.2863 as of 8:30 a.m. in London, the highest level since March 8, 2024, according to LSEG data.

The broad-based resurgence will be hailed by the newly elected Labour Party as Prime Minister Keir Starmer begins his first week in office.

Following Labour's landslide victory in the country's general election, Goldman Sachs this week increased its growth prediction for the United Kingdom. The party ran on a program emphasizing economic growth, housing, and planning.

Analysts consider the administration as typically supportive of UK assets, owing to the party's substantial parliamentary majority and business-friendly message.

In a report, Ashley Webb, U.K. economist at Capital Economics, highlighted the recent trend of British GDP rises — barring the absence of growth in April — "which supports the idea that the dual drags on activity from higher interest rates and higher inflation are starting to fade."

Price increases in the United Kingdom have slowed, falling from a 41-year high of 11.1% in October 2022 to the Bank of England's 2% objective in May this year. The success has fueled speculation that the Bank of England would lower interest rates soon.

However, even when its European Central Bank peers began their own path of interest rate decreases, the BOE maintained a cautious tone at its June meeting, warning that key indications of inflation persistence in the UK "remained elevated." Markets remain evenly divided on the possibility of a cut at the August meeting.