NIESR sees signs growth rebounded in May

The British economy staged a remarkable bounce back in May, according to the latest estimates produced by the independent National Institute for Economic and Social Research (NIESR). Evidence also emerged yesterday of some early signs of an ease in inflationary pressures.

A rise of almost 1 per cent in GDP during May, estimated by the NIESR, seems to have been something of a reaction to the loss of production in April, when the royal wedding and the long bank holiday seem to have disrupted manufacturing in particular. The Japanese natural and nuclear disasters that month also baldly affected component supply for car production, which resulted in a decline in headline industrial production (including oil and gas) of 1.7 per cent in April, and 1.5 slump in manufacturing. Construction activity fell by 13.8 per cent in April.

The NIESR say that output grew by 0.4 per cent in the three months ending in May after growth of 0.1 per cent in the three months ending in April. Despite the improving trend they caution: "Growth remains subdued. These figures suggest the level of output is still almost 4 per cent below its pre-recession peak. We do not expect the level of output to return to the pre-recession peak until early 2013."

If the economy does indeed take five years to get back to its pre-recession levels it will be the longest slump in over a century, even longer than that of the early 1930s, also preceded by a financial crisis.

On inflation, the Bank of England said that expectations for price rises – a key factor in Monetary Policy Committee decision-making – eased in the second quarter, but it does not seem to be having much impact on the labour market. That will encourage the Bank to leave rates lower than they might otherwise.

One new question in the Bank survey asks what households plan to do in response to inflation. Most people said they would shop around for better deals and cut back on spending. The least common response was "push for increased pay with current employer".

Meanwhile, the Office for National Statistics reported that producer output prices or "factory gate" inflation, rose by 0.2 per cent on the month in May, while input costs dropped by 2 per cent. Allan Monks, an economist at JP Morgan, said: "Although core producer price inflation is still running high, finished goods prices – which bear a closer relationship to price changes of goods bought by consumers – were flat in the month.

"The recent drop in commodities will likely take the sting out of measures of producer price inflation in the coming months, first via intermediate prices and then through finished goods prices.

"This is welcome news."