UK Economy Maintains Solid Recovery as Services Aid Growth
(Bloomberg) -- The UK maintained a steady pace of recovery from last year’s recession, putting Prime Minister Keir Starmer on a strong economic footing as he looks to boost growth and repair the public finances.
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Gross domestic product rose 0.6% in the second quarter after an 0.7% gain in the first three months of the year, the Office for National Statistics said Thursday. The reading was in line with economists’ expectations and reflected strength in government spending and the services sector.
The figures show the UK closing in on the rapid pace of expansion in Japan and the US, bringing Starmer’s Labour government closer to an ambitious goal of achieving the fastest in the Group of Seven economies. Britain is comfortably outgrowing the major economies of Europe.
The rapid growth came at a time when price and wage pressures in the UK have continued to ease, with headline inflation close to the Bank of England’s 2% target. While it started to cut interest rates earlier this month, officials are keeping policy restrictive to finish off the fight against inflation, particularly in the rapidly-growing services sector.
“There is good reason to expect that the second half of 2024 will be strong, too, given that wages are growing in real terms and the BOE has started to loosen monetary policy,” said Jake Finney, an economist at PwC. “However, there is still some way to go if the government is to meet its ambitious target.”
The figures are unlikely to shift the calculus of policymakers at the BOE, which had expected an even stronger 0.7% expansion. BOE Governor Andrew Bailey is seeking to balance the risk of further inflation against underlying weakness in the economy that’s turning up in business surveys.
Investors are betting on one or two more quarter-point reductions this year after the first downward move on Aug. 1. There was no move in early trading on bets for the next cut coming in November, and the pound was little changed against the dollar.
What Bloomberg Economics Says ...
“The pace of expansion over the first two quarters of the year is about double what the economy is likely to be able to achieve without stoking inflation but we doubt it will stand in the way of the Bank of England lowering rates again this year. There are currently few signs the economy is running hot.”
—Dan Hanson, chief UK economist. Click to read the REACT.
The GDP figures underscored signs of vulnerability for the recovery, with the economy flatlining in June alone as the services sector contracted. June output was held back by the election campaign, cool weather and strikes in the National Health Service. In the quarter, consumer spending and business investment were both weaker than expected.
Industry groups say their surveys point to a slowdown in the rest of the year unless interest rates fall and the government removes barriers to further growth. They’re looking toward Chancellor of the Exchequer Rachel Reeves’s first budget on Oct. 30, where she’s said difficult choices would be needed to close a gap in the public finances.
“This pace of growth is not set to last,” said Anna Leach, chief economist at the Institute of Directors. “Business surveys point to modest momentum through the summer months, no doubt affected by still-high interest rates.”
While there was a small contraction in services output in June, it was the main driver of growth in the second quarter, expanding 0.8%. It offset 0.1% falls in both industrial production and construction over the quarter.
The ONS said that scientific research, the IT industry and legal services all contributed to the quarterly GDP gains. It helped to offset weak business investment and a disappointing 0.1% rise in output from consumer-facing services after retail sales were heavily impacted by poor weather. However, consumer spending could be supported in the coming months by rapid growth in real wages after households were battered by double-digit inflation.
While Starmer didn’t enter power until the second quarter was over, he could reap the rewards if the economy maintains its brisk pace without stoking inflation.
“A second successive quarter of above-trend growth suggests the UK economy has finally shaken off its slumber of recent years,” Ben Jones, lead economist at the CBI, Britain’s biggest business lobby group. “We think the quarterly data probably overstates the underlying momentum in the economy.”
Starmer has vowed to boost UK growth to 2.5% and the highest in the G-7, lofty pledges for an economy that has spluttered at a lackluster pace in recent years. Analysts have warned that the Labour government would need rapid growth if it is to deliver enough funding to improve crumbling public services.
His government is already embarking on a blitz of policies to lift the rate of expansion, most notably reforms to overhaul the onerous planning system. It will also get growth tailwinds from real wages recovering from the cost-of-living crisis and the Bank of England starting to cut interest rates earlier this month.
The picture when taking into account population increases was also less upbeat. While GDP per head rose 0.3% in the three months to June, a second quarter of growth, it is still 0.1% lower than it was a year ago after a long run of falls.
--With assistance from Eleanor Thornber.
(Updates with details from the report and comment.)
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