UK economy surprises with strongest growth in more than a year

The UK economy delivered its strongest quarterly growth in more than a year, a surprise that indicated resilience in the face of soaring borrowing costs.

Gross domestic product rose 0.2 per cent from the first quarter, the biggest increase since the first quarter of 2022, the Office for National Statistics said Friday. The Bank of England had expected a 0.1 per cent expansion.

Output in June jumped 0.5 per cent, more than double the 0.2 per cent pace expected by economists.

Manufacturing and construction output were both stronger than expected in June, rebounding from the loss of a working day in May for King Charles III’s coronation. The pound jumped after the report, which may add to the case for further interest-rate hikes.

Consumer spending during the quarter rose 0.7 per cent, its biggest quarterly increase in more than a year. Business investment climbed 3.4 per cent, a similar pace to the previous quarter. There was also a strong increase in government spending.

The Bank of England is concerned that the economy’s pace, while sluggish by historical standards, is fanning upward pressure on wages and prices. While inflation has edged lower from last year’s high, it remains more than triple the BOE’s 2 per cent target.

The UK remains the only Group of Seven country that has yet to fully recover from the pandemic, with output last quarter 0.2 per cent below its level at the end of 2019.

UK prime minister Rishi Sunak is counting on an economic revival to rescue his Conservative Party before a general election expected late next year.

However, the figures for the latest quarter may mark a high point, with analysts expecting further interest-rate increases to weigh on activity in the months ahead.

The second quarter saw a series of disruptions, with output in April rebounding from widespread strikes the month before. GDP shrank 0.1 per cent in May due to the loss of a business day for the King’s coronation.

While the BOE expects a more meaningful expansion in the third quarter, economists are more pessimistic, citing a sharp loss of momentum signalled by recent purchasing manager surveys.

Bloomberg Economics predicts a yearlong recession starting at the end of 2023. While shallow in historic terms, the downturn would keep GDP below 2019 levels until 2026.

Living standards are expected to receive a boost as inflation drops below the pace of wage growth. For many, however, any benefits are likely to be swallowed up by more expensive home loans and rents.

Millions of households are facing a severe shock as they forced to refinance fixed-rate mortgages at significantly higher rates. – Bloomberg