The UK economy accelerates in the second quarter

The UK economy grew faster than expected during the second quarter, as consumers were more resilient to rising interest rates.

The gross domestic product increased by 0.2 percent in the three months from April to the end of June compared with the same period a year ago, according to the Office for National Statistics. The Office for National Statistics reported that the quarterly GDP was still 0.2 percent below its pre-Covid high.

The Bank of England forecast had predicted a 0.1% growth between the first quarter and the second, while independent economists also expected this. The BoE stated last week that it did not expect the Economy would fall into recession but it expected it to remain in a near-stagnation for the next 2 years.

After the release of the data, the pound increased by 0.3 percent to $1.2715. Traders bet that the Bank of England would tighten monetary policy for longer as a stronger economic environment could lead to a slower fall in inflation.

Thomas Pugh of RSM in the UK, an auditing firm, stated that the recent US experience proved “inflation could fall quickly without a recession or even a sharp decrease in growth”.

Samuel Tombs said that the strength of June could be “the beginning of a sustained recovery”, as inflation began to ease and incomes for households started to rise again in real terms.

Chancellor Jeremy Hunt said that the data showed that “the measures we are taking to combat inflation are beginning to have an effect”.

James Smith, the research director of the Resolution Foundation think tank, stated that, while the UK’s resilient economy was good news, the “big picture” is that it has grown by only 0.4 percent since the beginning of 2022, the lowest growth rate in 65 years, outside of a full blown recession.

The first quarter saw a flattening of household spending. This has now increased by 0.7 percent. This was due to spending on energy, transport, restaurants, and recreation. The growth of 3.1% in government spending was mainly driven by administration, defence and health expenditures. This is due to the NHS pay agreement that ended some strikes.

ONS reported that the growth in the service sector of 0.1 percent quarter-on-quarter was largely due to the strength in film and television production and the warm weather in June, which boosted the hospitality sector. Manufacturing grew by 1.6 percent in the quarter over quarter due to a recovery in auto production.

The construction sector’s activity was stronger than expected due to the impact that interest rates had on the housing market. Repair and maintenance jobs outweighed a decline in new construction work.

Gross capital formation was flat for the quarter due to a drop in government investments and an increase in business investments.

The GDP increased by 0.5% on a monthly level between May and Juni, recovering from the 0.1 percent contraction between April and may, when an extra bank holiday for coronation suppressed production.

Analysts believe that the growth recovery could be short-lived. The effect of rising interest rates is yet to reach households.

Ruth Gregory, deputy UK chief economist at Capital Economics, stated that the distortions caused by the bank holidays, strikes, the unusually warm weather, and the large impact of the volatile pharmaceutical industry made it “hard” to judge the real state of the economy.