Are we out of recession


UK economy puts on massive growth spurt

25 July 2010,

The UK economy has confounded expectations by growing at 1.1% in the second quarter, its fastest rate for four years, official figures revealed today.

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Building growth: The construction sector grew at its fastest pace since 1963

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The first estimate for gross domestic product in April to June showed growth twice as fast as the 0.6% expected by economists and four times faster than the 0.3% seen in the first quarter, the Office for National Statistics said.

It is the third successive and substantially the best quarter of growth since the economy emerged from recession in the last quarter of 2009.

Growth was driven by the UK’s powerhouse services sector, which accounts for three quarters of the economy and saw its best quarter in more than three years with growth of 0.9%.

What GDP Means for rates.

But the construction sector was a standout performer, growing at its fastest pace since 1963. A huge 6.6% rise over the quarter contributed 0.4 percentage points to overall GDP as building bounced back from a snowbound first three months of the year.

The figure took the UK’s annual growth to 1.6%, the strongest rate since before the recession at the beginning of 2008.

Jonathan Loynes at Capital Economics said the figures suggest that growth in 2010 overall may now be close to 1.5%: recent independent forecasts of nearer to 1% hade been below the Government’s 1.3%.

But the message from analysts was that the second quarter will be ‘about as good as it gets’ for the the economy this year.

Loynes said there are two reasons ‘not to get too over-excited’: ‘First, while strong by any ordinary standards, Q2’s gain in GDP is less impressive in the light of the sharp falls seen during the recession. Activity is still over 4% below its Q1 2008 level.

‘And second, with recent business surveys weakening and the fiscal squeeze looming, Q2 looks very likely to be the peak in terms of the pace of growth – expect a much weaker second half.’

The data will give ammunition to ‘hawks’ at the Bank who believe interest rates should rise soon to restrain inflation. Until now the more ‘doveish’ majority on the monatory policy committee had successfully argued that the fragile economic recovery needed rates to stay at rock bottom.

Howard Archer of IHS Global Insight said the ‘absolutely incredible growth number’ will ‘make discussions within the MPC even more lively’.

‘The prospect of an interest rate hike before the end of the year has just jumped while further stimulus is now looking less likely.’ Gilt futures tumbled as the markets questioned how long the Bank of England would keep interest rates at their record 0.5% low, particularly with inflation running well above its 2% target.

Interest rate futures on money markets reacted violently with two-year ‘swaps’ rising from 1.35% in early trade to 1.43% by 1pm. The price had dipped to an all-time low of 1.345% earlier this week, reflecting an easing of inflation fears. Today’s data reversed that trend.

Ironically, CHIEF ECONOMISTS warn that the economy faces a ‘triple whammy’ of challenges: high inflation, high unemployment and sluggish growth.

GDP Growth chart

Mr Dale said in an interview yesterday that the economy will not return to normal for ‘an awfully long time’, while households must be braced for a squeeze on living standards.

The MPC considered recommencing their quantative easing scheme this month, so concerned were some members about the fragility of the recovery. The money supply was boosted by £200bn last year under the scheme.

The bank rate has sat at its record low of 0.5% for 15 months, and this has helped industry recover some of the ground lost to recession and supported High Street spending. But the MPC was concerned that the brutal cuts which are due in the government’s October spending review risk derailing that recovery.

With inflation well above its 2% target, however, the stronger-than-expected GDP performance will increase pressure on the MPC for a rise in interest rates.

Within the services sector, business and finance posted its strongest rise in almost three years – advancing 1.3% over the quarter.

Hotels and restaurants also saw a 0.7% advance while the only sector to register a fall was transport and communications – down 0.7% on the quarter due to the impact of Iceland’s volcanic ash cloud in April.

Production industries including manufacturing advanced by 1% between April and June but by far the strongest gains were enjoyed by the construction sector, which accounts for just over 6% of the economy.

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