Britain’s economy exceeded expectations by recording growth in the second quarter, paving the way for potential interest rate hikes from the Bank of England. However, it remains the only major advanced economy that has yet to fully recover to its pre-pandemic levels from late 2019. Official data released on Friday revealed that the economy grew by 0.2% in Q2, surpassing the consensus forecast of no growth in a Reuters poll of economists. The announcement caused the pound to surge against the US dollar and euro. June saw a monthly growth of 0.5%, outperforming the predicted 0.2% increase. This strong performance has increased speculation that the Bank of England will continue to raise interest rates, as the central bank emphasized the importance of the economy’s resilience in its decision-making process. The Bank of England had initially projected a growth rate of 0.1% for the second quarter.
The positive growth figures have presented a challenge for the Bank of England, as it may complicate their plans to pause interest rate increases. Neil Birrell, a fund manager at Premier Miton, stated, “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 release of the data, British government bond yields experienced a significant increase as investors analyzed the information. The Office for National Statistics attributed the rise in output in June to an additional national holiday in May. Manufacturing experienced its strongest quarter since early 2019, excluding the initial rebound from the first COVID-19 lockdown in 2020, with a 1.6% increase in output compared to the previous quarter. Additionally, business investment surged by 3.4% during the same period.
Finance Minister Jeremy Hunt expressed optimism about the economy, stating, “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.”
Despite avoiding a recession thus far, unlike the eurozone, the figures confirm that Britain has underperformed since the start of the COVID-19 pandemic. As of the second quarter, the country’s 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 recent resilience, most economists predict challenging times ahead. Ruth Gregory, an economist at Capital Economics, stated, “With much of the drag from higher interest rates still to come, we are sticking to our below-consensus forecast that the UK is heading for a mild recession later this year.”
In conclusion, Britain’s economy unexpectedly grew in the second quarter, providing support for potential interest rate hikes by the Bank of England. However, it remains behind other major economies in recovering to pre-pandemic levels. The positive growth figures have complicated the Bank of England’s plans to pause interest rate increases. Manufacturing and business investment experienced significant growth, while the finance minister expressed optimism about the economy’s future. Despite recent resilience, economists anticipate a mild recession in the near future.
