UK economy picks up pace in second quarter

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The UK economy picked up pace in the second quarter as consumers proved more resilient than expected in the face of rising interest rates.

Gross domestic product was 0.2 per cent higher in the period from April to June than in the previous three months, and 0.4 per cent higher than a year earlier, the Office for National Statistics said on Friday. This followed an expansion of 0.1 per cent in each of the previous two quarters but still left quarterly GDP 0.2 per cent below its pre-Covid peak.

The figures were slightly stronger than suggested by the Bank of England’s forecast, which pencilled in a 0.1 per cent expansion between the first and second quarters, as did independent economists. The BoE said last week that while it no longer expected the economy to fall into recession, it would remain near stagnation for the next two years.

The pound rose 0.3 per cent to $1.2715 after the data’s release as traders bet it might lead the Bank of England to keep monetary policy tighter for longer, as a stronger economy could mean inflation falling more slowly.

However, Thomas Pugh, UK economist at the audit firm RSM, said the recent experience in the US proved that “inflation can fall rapidly without a recession, or even a sharp reduction in growth”.

Samuel Tombs, chief UK economist at the consultancy Capital Economics, said June’s strength could mark “the start of a sustainable recovery” as inflation eased and household incomes began to grow again in real terms.

Chancellor Jeremy Hunt welcomed the data, saying it showed “the actions we’re taking to fight inflation are starting to take effect”.

But James Smith, research director at the Resolution Foundation, a think-tank, said that while the UK’s resilience was good news, “the big picture is that the UK economy has expanded by just 0.4 per cent since the start of 2022 — the weakest growth in 65 years outside of a full-blown recession”.

Household spending, which had flatlined in the first quarter, rose 0.7 per cent. The ONS said this was driven by spending on transport, recreation, restaurants and hotels and energy. Growth of 3.1 per cent in government expenditure was driven by spending on administration and defence, and on health — reflecting the NHS pay settlement to end strikes by some staff taking effect.

The ONS said quarter-on-quarter growth of 0.1 per cent in the service sector was driven by strength in film and TV production, and by warm weather boosting the hospitality sector in June. A recovery in auto manufacturing drove a quarter-on-quarter expansion of 1.6 per cent in manufacturing.

Activity in the construction sector was much stronger than expected, given the impact of interest rates on housebuilding, with growth in repair and maintenance work outweighing a fall in new building work.

A drop in government investment offset higher business investment, leaving gross capital formation flat in the quarter.

On a monthly basis, GDP grew by 0.5 per cent between May and June, bouncing back from a contraction of 0.1 per cent between April and May, when the extra coronation bank holiday suppressed output.

Some analysts think the pick-up in growth could prove shortlived, with much of the effect of higher interest rates yet to feed through to households.

Ruth Gregory, deputy chief UK economist at the consultancy Capital Economics, said the distortion caused by the bank holiday, along with strikes, unusually warm weather and a big effect from the volatile pharmaceutical sector made it “hard to judge the true state of the economy”.