(Bloomberg) -- The UK’s economy bounced back strongly from a shallow recession at the end of last year, providing some relief for Prime Minister Rishi Sunak who has so far struggled to deliver on his promise to revive growth.

Gross domestic product jumped 0.6% in the first quarter compared to the previous three months as customers returned to shops and investment rose again, the Office for National Statistics said on Friday. That was the best reading since late 2021, when the UK loosened Covid-19 lockdown restrictions, and higher than the 0.4% expansion forecast by economists.

Besides the gains in retail sales and investment, output improved with fewer strikes in the health sector. Growth in the month of March alone was 0.4%, well above expectations due to a jump in both services and manufacturing. In the end, the downturn was the most mild for Britain in almost 70 years — representing a peak-to-trough decline of 0.4% in the second half of last year. 

“The worst is behind the UK economy,” said Yael Selfin, chief economist at KPMG UK. “Forward-looking indicators point to further momentum in the coming months.”

While stronger-than-expected growth could complicate the Bank of England’s path toward a potential rate cut this summer, the central bank expects the expansion to moderate in the second quarter. Money markets continued to place a roughly 50% chance of a quarter-point reduction next month, with at least one more cut to follow by year-end. That’s largely where they’ve been since BOE Governor Andrew Bailey signaled on Thursday that he was open to easing in June. 

The pound edged 0.1% higher to around $1.2540, making it one of the best-performing major currencies against the dollar on Friday. UK bonds have shrugged off the positive news, however, rising instead alongside euro area peers. That lowered the benchmark 10-year yield two basis points to a one-month low at 4.12%. 

The latest data shifts the rhetorical battle lines between Sunak’s Conservatives and Keir Starmer’s Labour Party as both promise better days for the economy ahead of an election expected to be called in the second half of the year. A return to growth gives the prime minister a bit of evidence to support his oft-repeated claim that “the plan is working” as he seeks to lift his party’s poll numbers off historic lows and soothe Tories anxious about the drubbing they got in local elections last week.

What Bloomberg Economics Says ...

“The first-quarter GDP beat adds upside risks to our view that Britain’s recovery from nearly two years of stagnation will be subdued. Assuming headline inflation falls to 2% in the coming months, we don’t think that will stand in the way of the Bank of England cutting rates as soon as June. Still, if the current momentum were to be maintained, it would, in time, add to inflationary pressures in the economy. That would likely prompt the central bank to ease by less than we’re expecting.”

—Ana Andrade, Bloomberg Economics. Click for the REACT. 

Chancellor of the Exchequer Jeremy Hunt said the figures were “proof that the economy is returning to full health,” adding on Sky News that the “difficult decisions we’ve taken over recent years are finally beginning to pay off, and we need to stick with them.” 

Labour, which had cited the recession as the end product of 14 years of Tory rule, had already this week attempted to re-frame the debate to focus on dissatisfaction of individual voters, a sentiment that Hunt’s Labour counterpart, Rachel Reeves, repeated after the data was released on Friday. 

“This is no time for Conservative ministers to be doing a victory lap and telling the British people that they have never had it so good,” Reeves said. “The economy is still £300 smaller per person than when Rishi Sunak became prime minister.”

The data also marked an end to a seven-quarter slide in output per person, a historically long “per capita recession” masked by record levels of migration as Sunak and Hunt looked to foreign workers to ease a tight labor market. GDP per head grew 0.4% in the first three months of the year, although it’s still estimated to be 0.7% lower than the period last year.

“All the signals since the start of this year certainly suggest things are finally starting to perk up,” Liz Martins, senior economist at HSBC, said on Bloomberg Radio. “The worry would be that if those rate cuts aren’t delivered, then the basis for this recovery is weakened, and maybe it takes out some of the momentum.”

Sunak is depending on an economic updraft to avert a historic wipeout in the upcoming election, with several Conservative ministers in marginal districts — including Hunt — forecast to lose their seats. The premier is hoping a “feel-good factor” will take hold among the electorate as inflation cools, mortgage rates ease and real wages rise. 

A 0.7% increase in services output drove the economy’s rebound in the first three months of the year. It ended three straight quarters of decline for the UK’s largest sector with households’ spending power being repaired by the the cost-of-living crisis fading. However, there was mixed news outside of services with industrial production growing 0.8% while construction output slipped 0.9%.

The ONS said imports into the UK had not been affected by disruption in the Middle East and the Red Sea. The UK’s trade deficit, when excluding precious metals, narrowed in the first quarter to £7.8 billion and has been steadily declining since the start of 2022.

“This is the start of a much brighter period for the UK economy than the last four years,” said Thomas Pugh, economist at RSM UK. “Rising real earnings, tax cuts and lower interest rates will give households disposable income a significant boost in the second half of this year, and a recovery in consumer confidence will ensure that most of that increase in income is spent.”

--With assistance from Andrew Atkinson, Aline Oyamada, Isabella Ward and Alice Gledhill.

(Updates with market reaction in fifth paragraph.)

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