UK growth beats expectations boosted by higher government spending
Output in the three months to June beat forecasts of 0.1 per cent from economists, but means the economy has slowed after a strong 0.7 per cent expansion in the first quarter of the year. The Bank of England had expected a second-quarter growth rate in the range of 0.1 to 0.3 per cent.
Official figures showed the economy rebounded in June, with GDP rising by 0.4 per cent in June, higher than estimates of about 0.1 per cent and after activity contracted by 0.1 per cent of GDP in April and May. The figures mean the economy expanded at an annualised rate of 2.2 per cent in the first half of the year, the fastest in the G7, and the second fastest on a quarterly measure behind the US.
Most major forecasters had expected annual GDP growth to be in the region of 1.1 to 1.2 per cent this year but the better-than-expected second quarter could lead to some upgrades, economists said. Analysts at Deutsche Bank said they expected third-quarter GDP to expand at a similar 0.3 per cent pace.
The Office for National Statistics (ONS) said the service sector, which makes up nearly three quarters of the economy, rose by 0.3 per cent in the three months to June and construction grew strongly at 1.2 per cent. Production, which includes manufacturing, contracted by 0.3 per cent. A measure of GDP per head, which reflects living standards, also rose by 0.2 per cent in the quarter.
The economy had been boosted by 'computer programming, health and vehicle leasing growing', Liz McKeown, director of economic statistics at the ONS, said. Services also drove growth in June, with scientific R&D, engineering and car sales all having a strong month. Within production, which recovered, the manufacture of electronics performed especially well.'
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Thomas Pugh, economist at RSM, said June's output figure 'suggests the economy is starting to recover from the barrage of tax and tariffs introduced in April. However, growth is set to remain subdued in the second half of the year as the drag from tariffs and payroll taxes continues.'
Most major forecasters had expected annual GDP growth to be in the region of 1.1 to 1.2 per cent this year, but the better-than-expected second quarter could lead to some upgrades, economists said. Economists at UBS on Thursday revised their growth forecast from 0.8 per cent to 1.2 per cent this year. Analysts at Deutsche Bank said they expected third-quarter GDP to expand at a similar 0.3 per cent pace.
Government spending rose by 0.3 per cent and household consumption was up marginally by 0.1 per cent. A measure of business investment shrank by 4 per cent in the second quarter and overall investment across the economy also contracted by 1.1 per cent after a 2 per cent rise at the start of the year.
The ONS said investment decline was 'mainly driven by transport, as well as declines in other machinery and equipment, and other buildings and structures'.
The ONS said the unusually strong start to the year reflected front-loading from companies trying to get ahead of tariffs and changes to stamp duty. Some tariff front-loading was still in effect as shown by company inventories rising in the second quarter.
The economy has since slowed, however, under the weight of rising inflation, high energy costs, restrictive interest rates, a slowing jobs market and worries about the global trading environment. Forward-looking surveys for the third quarter point to a drop in employment growth and fragile business confidence in the manufacturing sector.
Rachel Reeves said the figures 'are positive with a strong start to the year and continued growth in the second quarter but there is more to do to deliver an economy that works for working people. I know that the British economy has the key ingredients for success but has felt stuck for too long.'
The chancellor needs the economy to pick up speed to meet her fiscal targets at the autumn budget. Any downgrade to the UK's growth forecasts from the Office for Budget Responsibility will imply a shrinking tax base and a rising welfare bill, forcing the government to find additional tax rises or spending cuts to hit Reeves's target to balance the public finances by the end of the decade.
The second-quarter GDP figures are unlikely to prompt the Bank into immediate interest rate cuts from next month as policymakers have said that they are concerned about steadily accelerating inflation, which is due to peak at 4 per cent in September. The Bank targets a 2 per cent annual inflation rate.
The 20 economies that make up the eurozone recorded an average growth rate of 0.1 per cent in the second quarter and the United States expanded at a rate of 0.7 per cent in the three months to June
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