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UK growth bounces back as GDP rises by 0.7%

Published 28/07/2015

The economy is bouncing back after a weak start to the year
The economy is bouncing back after a weak start to the year

UK growth bounced back in the second quarter of 2015 as gross domestic product (GDP) increased by 0.7%, according to official figures.

It means GDP per head - a measure which takes into account that the nation's wealth is shared by an expanding population - has now caught up with pre-crisis levels at the start of 2008.

The overall GDP figure, published by the Office for National Statistics (ONS), was in line with expectations.

Confirmation that growth is now back on track could add to speculation about the timing of an interest rate being brought forward.

A return to form for the dominant services sector, which has led the economy out of recession, helped the UK improve on a disappointing start to the year when GDP increased by just 0.4%.

Tax breaks for the beleaguered North Sea oil and gas industry meanwhile helped the production sector to its strongest performance for four and a half years.

The mining and quarrying sub-sector within which oil and gas output is classified saw its best quarter for nearly 26 years.

But Britain's factories - which have been hit by the strength of the pound weighing on exports - struggled. Manufacturing shrank by 0.3%, the worst performance since the start of 2013.

The construction industry was also flat, continuing its sluggish run since the end of last year.

ONS chief economist Joe Grice said: "After a slowdown in the first quarter of 2015, overall GDP growth has returned to that typical of the previous two years.

"But the pattern has differed across the economy. Overall growth has been driven by the service sector and the strongest growth in mining and quarrying since 1989.

"However, manufacturing output has fallen slightly and construction has been flat.

"The growth announced today takes GDP per head back to broadly level with its pre-economic downturn peak in Q1 2008."

Chancellor George Osborne wrote on Twitter: "GDP growth 0.7%. Shows Britain motoring ahead with economy producing as much per head as ever before. We must stay on road we've set out on."

Today's initial estimate by the ONS showed that the services sector, representing more than three-quarters of economic output, contributed 0.5% out of the 0.7% growth figure.

It was boosted by a major improvement in business services and finance, which increased from 0.1% growth in the first quarter to 0.8% in the second quarter.

GDP is now 5.2% ahead of its level in the first quarter of 2008, prior to the recession which saw the economy shrink by as much as 6%.

The services sector is 9.2% ahead, but production is still lagging behind by 8.9% and manufacturing by 4.9%. Construction is 3.2% behind where it was seven years ago.

GDP per head - at £6,715 - is now just £2 below its level in the first quarter of 2008.

The figures come in the wake of comments by Bank of England governor Mark Carney that have heightened speculation about the timing of an interest rate hike.

Rates have been held at 0.5% for more than six years, but the economic recovery and a pick-up in wage growth mean an increase is expected in coming months.

A rise had been pencilled in for the middle of next year, although Mr Carney said in a recent speech that a decision as to when to raise them would "come into sharper relief around the turn of this year".

James Knightley of ING Bank said the pace of growth was shrinking the level of wasteful spare capacity in the economy.

"This is now translating into rising wage pressures and growing talk from Bank of England officials that interest rate rises may not be that far away," he said.

The Bank's Monetary Policy Committee (MPC) must set interest rates to try to keep inflation around a 2% target, a level which could arguably be threatened over the next couple of years by rising pay.

Mr Knightley said: "We suspect that two members of the MPC may well vote for a rate hike in August although there may not be critical mass until February next year."

Vicky Redwood, chief UK economist at Capital Economics, said: "The first estimate of UK GDP in the second quarter confirms that the economic recovery got back on track after its slowdown in the first quarter."

But she added that growth remained "very unbalanced", driven by services amid poor performances from construction and manufacturing.

Chris Williamson, chief economist at Markit, said the pick-up in growth came despite headwinds from the general election, the stronger pound and eurozone worries.

On the outlook for interest rates, he said: "The Bank of England had already pencilled-in a 0.7% expansion, so today's data merely confirm the growth trajectory built into the Bank's forecasts and do little to change the outlook for interest rates.

"However, by the same measure, the data support the case for rates to start rising sooner rather than later.

"Today's data therefore bring the likelihood of a rate rise later this year that little bit closer, though policy-makers 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."

Speaking during a visit to Leicestershire, Mr Osborne told Sky News: "These figures today show Britain is motoring ahead with our economy producing as much per person as ever before.

"But there are clear risks out there in the world economy from the eurozone to what's happening in the world's stock markets, and so it's vital that we stay on the road that we've set out on."

The pound rose by a cent against the euro and was also ahead against the US dollar.

But analysts pointed out that stripping out the effect of the volatile oil and gas sector, the pace of growth was just 0.5%, only a little ahead of the first quarter and well behind the average pace of expansion seen last year.

Simon Wells, chief UK economist at HSBC, said: "Underlying growth appears to have slowed and it is also increasingly reliant on the service sector alone.

"Assuming the current pace of growth in extraction isn't maintained, some recovery in manufacturing and construction will be needed to meet the MPC's (and HSBC's) forecast of 0.7% growth in Q3.

"Growth staying above its past average of 0.6% was a criterion for policy tightening identified by Mark Carney in a recent speech.

"So today's number keeps us on track for a rate rise early next year, but the MPC may want to see stronger and more balanced underlying growth in Q3."

TUC general secretary Frances O'Grady said: "The Government's economic plan is not delivering what was promised.

"We were told there would be a march of the makers, but instead manufacturing continues to decline. And while there is a desperate need for affordable homes, construction output remains in the doldrums.

Shadow chancellor Chris Leslie said: "UK growth needs to be stronger than this to withstand mounting instability from Europe, China and the world economy.

"Today's figures show we need a more balanced recovery, with construction output weak for the past nine months."

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