By William Schomberg
LONDON (Reuters) - Britain's new government has inherited an economy that is gathering momentum but the recent, stronger-than-expected growth figures do not mean Prime Minister Keir Starmer and his team have found a way out of their bind on public spending.
Over the three months to May, economic growth was the strongest in more than two years, the Office for National Statistics said on Thursday.
In May alone, the economy grew by 0.4%, double the forecast in a Reuters poll of economists and adding to signs that last year's shallow recession is firmly in the rear-view mirror.
"The question two months ago was whether growth would reach 1.0% this year. It is now possibly whether it will hit 1.5%," Philip Shaw, an economist with Investec, a bank, said.
Since the COVID pandemic, Britain's economy has been the second-weakest among the Group of Seven nations after Germany, adding to the drag on incomes that, adjusted for inflation, have struggled to gain since the 2007-2009 financial crisis.
Slow growth is also limiting the new government's ability to offer quick progress on fixing the country's strained health system and other public services, given Starmer's promise to voters not to raise the main forms of taxation.
Starmer says he will get Britain back to its 2.5% growth pace of the early 2000s with a combination of reforms to the restrictive planning system that has thwarted home-building and new infrastructure, support for strategic sectors and providing the political stability needed for attracting investors.
But that process will play out over the coming years, leaving the government at the mercy of the short-term outlook for the economy for the time being.
That immediate outlook appears to be brightening.
SHORT-TERM UPGRADE, LONG-TERM PROBLEMS
The official forecasts that underpin the tax and spending plans of the last Conservative government foresaw economic growth of 0.8% in 2024.
Considered optimistic when it was made in March, the projection for this year could prove too conservative in the light of the latest growth data.
Goldman Sachs on Thursday nudged up its growth forecast for 2024 to 1.2% from 1.1%.
James Smith, an economist with ING, said the economy would probably slow from its current pace in the second half of 2024, but growth looked to set remain reasonable.
Furthermore, the BoE is expected to begin cutting interest rates in the coming months, further easing the squeeze on many households after a fall in inflation back to normal levels.
But much of the recent recovery is likely to prove to be a short-term rebound in spending power caused by the fall in energy prices which soared after Russia's invasion of Ukraine.
The government's hopes of getting more room in the budget to invest in Britain's struggling health service or fix the many other problems in the public sector lie with the longer-term forecasts of the country's budget watchdog.
The Office for Budget Responsibility will publish its next assessment of Britain's growth prospects when new finance minister Rachel Reeves delivers her first budget statement, probably in October or November.
Those forecasts risk being lower than the March projections with the economy facing headwinds that range from stubborn inflation pressures and the lack of enough workers to the risk of a more protectionist global economy.
"Yes, the economy is looking better now," Smith, the ING economist, said. "But the OBR growth forecasts are more likely to see downwards revisions than upward revisions. Essentially, that means less headroom."