UK growth upturn 'very encouraging'

The UK economy is recovering faster than thought after official figures showed surging exports helped drive growth 0.7% higher between April and June.

UK growth upturn 'very encouraging'

The UK economy is recovering faster than thought after official figures showed surging exports helped drive growth 0.7% higher between April and June.

The Office for National Statistics (ONS) revised second quarter growth up from its first estimate of 0.6%, boosted by higher output across construction, manufacturing and parts of services.

Economists said the recovery was also looking more “durable” as output was helped by a 3.6% increase in exports and rising business investment.

Growth more than doubled from 0.3% expansion in the first three months of the year and experts said more upbeat data in recent days has fuelled hopes of another strong reading in the third quarter.

The Treasury said the upward revision to gross domestic product (GDP) confirmed the UK is “moving from rescue to recovery”.

A spokeswoman said: “There is still a long way to go, but the economy is on the right track and the Government is committed to its economic plan that has already cut the deficit by a third and enabled the private sector to create over 1.3 million new jobs.”

Markit chief economist Chris Williamson said it was a “very encouraging picture of a broad-based upturn across almost all sectors of the economy”.

JP Morgan economist Allan Monks added: “The demand side looks even more balanced than we thought, which sends an encouraging message about the longevity of the recovery.”

A drop in Britain’s net trade deficit – the gap between exports and imports - fell to £3.2 billion in the second quarter from £4.3 billion in the first quarter, and contributed 0.3% to the increase in output.

Net trade has added to Britain’s growth for two consecutive quarters for the first time since early 2011.

The 3.6% surge in exports was the highest since late 2011, while imports rose 2.5% quarter-on-quarter, marking the biggest gain since the third quarter of 2010.

The ONS said output from the UK’s building sites expanded by 1.4% in the second quarter, up from an initial 0.9% estimate as the housing market is ignited by state stimulus schemes including Help to Buy and Funding for Lending.

There were also brighter signs from factories, which grew output by 0.7% during the quarter, up from an initial 0.4% estimate.

Services growth overall was unchanged at 0.6%, but within the sector, output from distribution, hotels and catering firms was revised up to 1.7% from 1.5%, while growth across business services and finance was also revised higher to 0.6% from 0.5%.

Output from the agriculture sector was also lifted to 1.7% from the 1.1% first estimate.

Spending by households increased 0.4% quarter-on-quarter, boosted by pay and pension contributions growing by 2.4%.

That was highest quarterly pay increase since late 2000, with the spike driven by unusually high bonus payments in April.

Government spending was up by 0.9% in the quarter and the purchase and sale of production equipment rose 1.7%.

Britain’s growth prospects have been reinforced by the eurozone, its biggest trading partner, recently clawing its way out of recession with expansion of 0.3% in the second quarter.

Economists said more bright signs on the home front, such as a CBI survey yesterday showing factory orders blossomed in August, will add to optimism around third-quarter growth.

Nida Ali, economic adviser to the EY Item Club, said: “All in all, these figures are encouraging and monthly indicators suggest that the third quarter will be good as well.”

Vicky Redwood, chief UK economist at Capital Economics, added: “The recovery seems to be becoming more balanced, which is just as well, given that the consumer-driven growth seen previously was largely based on households running down their saving.”

But accelerating growth will also give the Bank of England a headache with its bold new policy of tying interest rises to the unemployment rate.

The Bank has pledged not to raise rates from their record 0.5% low until unemployment drops to 7% from its current 7.8% level – creating more than 750,000 jobs.

But the FTSE 100 Index has suffered heavy falls since the guidance was given, while the yield on government debt has risen, as markets speculate that rising growth will trigger a sooner-than-expected rate rise.

Mr Williamson said: “The Bank of England is facing a growing challenge of how to convince the markets and households that interest rates will not need to rise over the next three years.

“Given the strength of the GDP and survey data, and the fact that better growth now appears to be driving a strong upturn in the labour market, it’s hard to see how an increasingly hawkish mood will not creep into the monetary policy meetings.”

The ONS said overall economic output is 3.2% below its peak in the first quarter of 2008.

It dropped as low as 7.2% below the peak in the second quarter of 2009.

The first GDP estimate published in late July was based on 44% of data, while today’s estimate is based on 88%.

Chris Leslie, Labour’s shadow financial secretary to the Treasury, said: “These figures confirm that after three wasted years of flatlining we finally have some welcome but long overdue growth.

“But for all George Osborne’s complacent claims that the economy is now fixed, for ordinary people things are getting harder.

“While millionaires have been given a huge tax cut, most people are still seeing prices rising much faster than wages.”

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