As a result of recent positive data, several economic research institutions have begun revising their UK growth forecasts slightly upward. However, many economists warned that the UK economy still faces several challenges ahead.

by Xinhua writer Zhang Yadong

LONDON, June 5 (Xinhua) -- The British economy is showing signs of slight improvement with recent data pointing to moderate growth, but lingering challenges such as domestic policy shocks and trade uncertainties continue to cloud the outlook.

Data released by S Global on Monday showed that the United Kingdom's (UK) Manufacturing Purchasing Managers' Index (PMI) rose from 45.4 in April to 46.4 in May. Although the sector remains in contraction, the index has improved compared to April, reaching a nearly three-month high.

Rob Dobson, director at S Global Market Intelligence, pointed out that the May PMI data shows the UK manufacturing sector continues to face significant challenges, including market volatility, trade uncertainty, weak customer confidence and rising input costs driven by increased taxes and wages. However, there are also signs of recovery. The PMI sub-indices tracking output and new orders have both risen over the past two months, suggesting that the country's economic downturn is easing.

The UK Services PMI for May returned to expansion territory, rising from 49 in April to 50.9, S Global reported on Wednesday. For May, the Composite PMI, which includes both manufacturing and services, increased from 48.5 in April to 50.3.

Tim Moore, UK economist at S, noted that the UK services sector returned to growth in May, with easing concerns over U.S. tariffs, a rebound in global financial markets and a recovery in business confidence. Optimism among service-sector business leaders also rose to the highest level since October 2024.

The positive signs are not limited to macroeconomic data. Industry-specific data also shows improvement. After a slight decline in April, UK house prices rose in May. According to mortgage lender Nationwide Building Society, house prices rose 3.5 percent year-on-year in May.

Nationwide's Chief Economist Robert Gardner said that following the impact of higher stamp duty in April, buyer enthusiasm rebounded in May. Despite growing global economic uncertainty, rising UK employee wages, low unemployment and falling mortgage rates due to the Bank of England's interest rate cuts have all supported the continued increase in house prices.

Retail sales also performed better than expected. The UK Office for National Statistics (ONS) reported that retail sales volume rose by 1.2 percent month-on-month in April, exceeding the market's basic expectation of 0.4 percent. Including April, UK retail sales have now risen for four consecutive months, with April's increase being the strongest so far this year.

The recent improvements in the British economy came alongside positive expectations on trade after the British government secured agreements with India, the United States and the European Union. UK Prime Minister Keir Starmer said that these agreements have helped safeguard jobs, accelerate economic growth and boost wages. According to the latest quarterly economic forecast by the British Chambers of Commerce (BCC), following the conclusion of these trade agreements, UK exports are expected to grow by 2 percent in 2025, whereas the previous forecast had predicted a 0.5-percent contraction.

As a result of recent positive data, several economic research institutions have begun revising their UK growth forecasts slightly upward. On May 27, the International Monetary Fund raised its forecast for UK GDP growth in 2025 from 1.1 percent to 1.2 percent, and projected growth could reach 1.4 percent in 2026. The BCC's latest quarterly forecast suggested the British economy could grow by 1.1 percent this year, a slight upgrade on its previous 0.9 percent projection.

However, many economists warned that the UK economy still faces several challenges ahead. Some domestic policy shocks, such as increases in employers' national insurance contributions, have yet to fully show their impact.

David Bharier, head of research at the BCC, said the new forecast was "promising," but most small and medium-sized enterprises (SMEs) were not experiencing growth as they have to "grapple with a range of cost pressures -- most notably the rise in national insurance contributions, cited as the top concern by firms."

Meanwhile, Vicky Pryce, chair of the BCC Economic Advisory Council, warned that the growth upgrade was "masking some persistent challenges under the bonnet of the UK economy."

"Inflation is in danger of remaining stubborn for the foreseeable future, casting fresh doubt on the likelihood of further interest rate cuts any time soon. SMEs are crying out for an easing of cost-pressures to allow investment to increase across all sectors," Pryce said.

"Businesses have welcomed recent UK trade deals, but they are holding their breath as they await the next twists and turns in the uncertain U.S. tariff story," the economist said.