UK economy shows Q2 strength, puts rate hike on line | economy

The UK economy posted unexpected growth in the second quarter, setting the stage for further interest rate hikes by the Bank of England, but it remains the only major advanced economy to have recovered to pre-Covid levels in late 2019.

Official data released on Friday showed the economy grew 0.2% in the second quarter, against expectations for stability in a Reuters poll of economists. Performance was buoyed by monthly growth of 0.5% in June, above all forecasts in a Reuters survey, which had pointed to a 0.2% increase.

The strong performance reinforced that the central bank will continue to raise interest rates, stressing this month that the economy’s resilience is one of the factors weighing on its decision.

The central bank itself had forecast 0.1% growth in the second quarter.

“This gives the Bank of England a headache – they can expect to stop raising interest rates soon, but this data will make that more difficult,” said Neil Birrell, fund manager at Premier Mitten.

The Office for National Statistics said companies cited an extra national holiday in May as a reason for the increase in output in June compared with the previous month.

Barring an early recovery from the first Covid-19 lockdown of 2020, manufacturing had its best quarter since the start of 2019, with production up 1.6% in the quarter.

Business investment also picked up, growing 3.4% in the quarter.

“The measures we’re taking to fight inflation are starting to pay off, which means we’re laying the solid foundations needed to grow the economy,” Finance Minister Jeremy Hunt said.

Although the UK has so far avoided recession, unlike the eurozone, the figures confirmed its relatively poor performance since the start of the Covid-19 pandemic.

The UK economy is now down 0.2% at the end of 2019, compared with 0.2% for Germany, 1.7% for France, 2.2% for Italy and 6.2% for the US.

Despite the recent downturn in the economy, most economists believe tougher times are ahead.

“With the bulk of interest rate hikes still to come, we are keeping our less consensus forecast that the UK will head into a mild recession later this year,” said Ruth Gregory, economist at consultancy Capital Economics.