Strong GDP growth adds to interest rate rise expectations

THE UK economy has returned to the more buoyant levels seen in 2014, with GDP in the second quarter growing by 0.7%.

It follows a sluggish first-quarter increase of 0.4%, the joint-lowest performance in two years.

Today’s announcement will add to expectations that an interest rate rise is getting nearer, especially as the Bank of England’s governor Mark Carney last week said that rates could rise “at the turn of this year” after six years at 0.5%.

The rise in the three months to June was driven by the production and services sector, with construction showing flat growth and agriculture shrinking.

Chris Williamson, chief economist at Markit, said the figures were “welcome news” which showed the economy was growing solidly despite headwinds from the general election, the stronger pound and Eurozone worries.

He added: “The latest Monetary Policy Committee meeting at the Bank of England indicates that at least three of the nine members are likely to vote for a rate rise at the August meeting. Mark Carney, the Bank’s governor, has also indicated that the decision to start hiking rates will come into focus at the turn of the year.

“Today’s data therefore bring the likelihood of a rate rise later this year that little bit closer, though policymakers 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 Bank will also be concerned that higher interest rates will inevitably lead to upward pressure on sterling, which has already risen to its highest since 2007 on a trade weighted basis and created an uneven recovery, hitting the export-focused manufacturing sector in particular, which has slipped back into decline. However, much depends on policy in other countries.”

Pauline Biddle, practice senior partner of accountancy and advisory firm Deloitte in the Midlands, said: “The UK recovery is back on track after a lacklustre start to the year. A rebound in business services, utility output and mining contributed to the bounce back in growth.

“This recovery is made in Britain with rising incomes and low inflation buoying consumer spending.

“By contrast faced with a rising pound, up 20% from its 2013 lows, today’s data show the manufacturing recovery has lost momentum in recent months.”