UK economy posts unexpected growth in Q2 but still lags behind peers

LONDON - Britain’s economy eked out unexpected growth in the second quarter, laying the ground for more interest rate hikes from the Bank of England (BOE), but it remained the only big advanced economy yet to regain its pre-pandemic, late-2019 level.

Official data on Friday showed that the economy grew 0.2 per cent in the second quarter, against the consensus for a flat reading in a Reuters poll of economists.

The figures sent the pound sharply higher against the US dollar and euro.

The performance was helped by monthly growth of 0.5 per cent in June, above all forecasts in the Reuters poll that had pointed to a 0.2 per cent uptick.

The strong showing bolstered bets that the BOE would keep on raising interest rates, given that the central bank stressed in August that resilience in the economy was one of the factors that would underpin its judgment.

The central bank itself pencilled in growth of 0.1 per cent for the second quarter.

“It gives the Bank of England a headache. They may well have been thinking about pausing interest rate increases soon, but this data will make that more difficult,” said fund manager Neil Birrell from asset manager Premier Miton.

The Office for National Statistics said businesses cited an additional national holiday in May as a factor for the increased output in June, compared with May.

Manufacturing had its best quarter since early 2019, excluding the initial rebound from the first Covid-19 lockdown in 2020, with output up 1.6 per cent on the quarter.

Business investment also rose, up 3.4 per cent on the quarter.

“The actions we’re taking to fight inflation are starting to take effect, which means we’re laying the strong foundations needed to grow the economy,” said Finance Minister Jeremy Hunt.

While Britain has so far dodged a recession, unlike the euro zone, the figures confirmed its relatively poor performance since the onset of the Covid-19 pandemic.

Britain’s economy now stands 0.2 per cent below its level in late 2019 as at the second quarter, compared with 0.2 per cent above for Germany, 1.7 per cent for France, 2.2 per cent for Italy and 6.2 per cent for the United States.

Most economists think tough times are ahead despite the economy’s recent resilience.

“With much of the drag from higher interest rates still to come, we are sticking to our below-consensus forecast that the UK is heading for a mild recession later this year,” said economist Ruth Gregory from consultancy Capital Economics. REUTERS