The unexpected strength of UK economy has opened the door for potential interest rate hikes from the Bank of England (BoE), even though it remains the only major advanced economy that has not yet fully recovered to its pre-COVID levels of late 2019.
Official data released on Friday revealed that the economy saw a 0.2% growth in the second quarter, defying the anticipated flat reading that economists in a Reuters poll had projected. As a result of these figures, the pound surged against both the U.S. dollar and the euro.
This impressive performance received aid from a 0.5% monthly growth in June, surpassing all the forecasts from the Reuters poll, which had only predicted a 0.2% increase.
The strong performance has increased expectations that the BoE will continue to raise interest rates. This sentiment gains reinforcement from the central bank’s emphasis this month on the economy’s resilience as a key factor shaping its decisions.
The BoE itself had initially predicted a growth rate of 0.1% for the second quarter.
Neil Birrell, a fund manager from Premier Miton, commented, “It gives the Bank of England a headache – they may well have been thinking about pausing interest rate increases soon, but this data will make that more difficult.”
Following the data release, British government bond yields experienced a significant surge as investors absorbed the information.
The Office for National Statistics highlighted that businesses attributed the increase in output in June compared to May to an additional national holiday in May.
Rebound after COVID-19 lockdown.
The manufacturing sector had its most impressive quarter since early 2019, with output increasing by 1.6% for the quarter, excluding the initial rebound after the first COVID-19 lockdown in 2020.
Business investment also experienced a notable surge, rising by 3.4% for the quarter.
Finance minister Jeremy Hunt noted, “The actions we’re taking to fight inflation are starting to take effect, which means we’re laying the strong foundations needed to grow the economy.”
Although the UK has managed to avoid recession unlike the euro zone, the figures confirm that the country’s performance has been relatively lackluster since the onset of the COVID-19 pandemic.
As of the second quarter, the UK economy remains 0.2% below its late 2019 level, in contrast to Germany which is 0.2% above, France at 1.7%, Italy at 2.2%, and the United States at 6.2%.
Despite the recent resilience displayed by the economy, many economists are anticipating challenging times ahead.
Economist Ruth Gregory from Capital Economics stated, “With much of the impact from higher interest rates yet to be felt, we maintain our below-consensus forecast that the UK is heading for a mild recession later this year.”
