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.

Graph from the Office for National Statistics

Separate data, from retail analysts Kantar Worldpanel, has shown Morrisons has continued to improve its relative performance , but Yorkshire’s other big supermarket chain, Asda, has continued to struggle.

Morrisons performed the strongest of the big four, with sales down 0.1% in the 12 weeks to July 19, but Asda’s sales fell 2.7%. 

READ MORE Asda gets overtaken in market share whilst Morrisons continues its comeback

Chris Williamson, chief economist at Markit, said the GDP 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.”