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Services, Finance and Oil have driven U.K. GDP Growth

U.K. economic growth accelerated in the second quarter as business services and finance strengthened and North Sea output surged.

The 0.7 %  increase in gross domestic product marked a 10th straight expansion and followed a 0.4 % advance in the previous three months. It was in line with the median forecast in a Bloomberg survey.

The report suggests the recovery remains lopsided and led by the dominant services industry, where growth accelerated to 0.7 %. While oil and gas helped industrial output rise 1 % on the quarter, the most since the end of 2010, manufacturing declined 0.3 %. Construction was unchanged.

“After a slowdown in the first quarter of 2015, overall GDP growth has returned to that typical of the previous two years,” Joe Grice, chief economist at the Office for National Statistics, said in a statement issued with the data in London on 28th July. The rebound takes GDP per head “back to broadly level with its pre-economic downturn peak” in the first quarter of 2008, he said.

The pound climbed the most in 2 weeks against the euro after the data and was trading at 70.73 pence per euro as of 12:42 a.m. London time. It rose 0.2 % to $1.5586.

With the U.K. economy in its longest period of continuous growth since before falling into recession in 2008 and unemployment falling, Bank of England Governor Mark Carney has said the time of record-low interest rates may soon end. He’s also said any tightening will be gradual, citing headwinds from the government’s fiscal program and weak euro-area demand.

In recent weeks, there has been a flurry of communication from members of the Bank of England’s Monetary Policy Committee (MPC) about the likely timing of the first interest-rate increase. With demand on track relative to the forecasts in the May Inflation Report and wages gathering pace, the debate is likely to intensify into the autumn.

Even though today’s data are in line with the Bank’s expectation for the second quarter, it’s important to remember that the MPC will be looking at a variety of indicators when judging the appropriate stance of monetary policy. Of late, the MPC has been particularly focused on the path of nominal wages, especially relative to productivity, as efficiency gains make space for employers to increase wages without putting upward pressure on inflation.

The data “bring the likelihood of a rate rise later this year that little bit closer,” said Chris Williamson, chief economist at Markit in London. “Though policy makers will be keenly watching the data flow over the coming months to ensure the economic upturn remains on track and able to withstand higher borrowing costs.”

The ONS data is a first estimate and may be revised. It’s based on about 44 % of the information that will ultimately be available. Compared with a year earlier, GDP grew 2.6%. Output is now 5.2 % above its pre-recession peak.

Services, the largest part of the economy, accounted for 0.5 percentage point of the increase in GDP in the second quarter. It was driven by business services and finance, which had contributed nothing in the first 3 months of the year.

On an annualized basis, the economy grew 2.8 %. The U.S. economy probably grew an annualized 2.5 % in the March-June period, according to a Bloomberg survey of economists.

U.K. GDP is projected to increase 2.5 % in 2015 and 2.3 % in 2016, according to economists in a Bloomberg survey.

Stronger growth will likely translate into higher tax receipts, leaving Osborne “on course to have some extra money to play with by the time of the next Autumn Statement and Budget,” said Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research. Nevertheless, “the big structural issues in the U.K. economy remain - with too little growth driven by exports, business investment and infrastructure spending.”

The strength of the pound continues to drag on exports, with even the BOE warning of this could have an “adverse impact on the balance of growth in the economy.”

North Sea output is a volatile component of GDP and the ONS said tax incentives announced by Chancellor of the Exchequer George Osborne earlier this year may have boosted output in the second quarter. Mining and quarrying, of which North Sea output accounts for the majority, jumped 7.8 %, the most since 1989.

The Confederation of British Industry said on Monday that its index of manufacturing orders dropped to a two-year low in July and that export growth remains “sluggish.”

 

by Anna Maximova, PhD in economics

(adopted from Bloomberg business news)