The U.K. economy expanded by 0.6% in the second quarter of the year, as reported by the Office for National Statistics on Thursday, maintaining the country’s gradual recovery from recession. This growth figure aligned with the expectations of economists surveyed by Reuters and followed a 0.7% increase in the first quarter.
In June, economic growth remained stagnant, in line with a Reuters poll, with a slight decline of 0.1% in the U.K.’s dominant services sector. However, construction and production output saw increases of 0.5% and 0.8%, respectively, during the same month.
Throughout the year, the British economy has shown consistent but modest growth, with GDP remaining flat in April due to factors such as adverse weather affecting retail sales and construction output. On an annual basis, the economy expanded by 0.9% in the second quarter, surpassing the forecast of 0.8%.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, noted that the second quarter’s growth was driven by temporary factors like lower inflation and increased consumer spending from events such as Euro 2024, rather than a substantial improvement in the U.K.’s underlying growth trajectory. Thiru also mentioned that the pace of growth is expected to slow in the second half of the year due to challenges like weaker wage growth, high interest rates, and supply constraints.
In July, U.K. inflation rose to 2.2%, slightly below the consensus forecast of 2.3%, according to data released by the ONS. This led the Bank of England to reduce interest rates by 25 basis points at the beginning of August. Analysts interpreted the July figures as supportive of continued monetary easing for the remainder of the year, despite persistent services inflation.
Wage growth in the U.K., excluding bonuses, decreased to a two-year low of 5.4% during the April-June period. Lower interest rates are expected to stimulate economic growth by making borrowing more affordable for households and businesses in the upcoming months, although the full impact may take time to materialize.
Following the release of Thursday’s GDP data, the British pound saw a slight increase, rising by 0.25% against the U.S. dollar and 0.2% against the euro in London. Various institutions, including the International Monetary Fund, Goldman Sachs, and the Bank of England, have raised their growth forecasts for the U.K. economy in recent months, citing factors such as declining inflation and planned reforms by the new Labour government.
Prime Minister Keir Starmer and Finance Minister Rachel Reeves have emphasized their commitment to boosting economic growth, setting a target for the U.K. to achieve the fastest per capita GDP growth among the Group of 7 nations. Labour is scheduled to present its first budget on Oct. 30, which is expected to provide clarity on the government’s fiscal strategy, taxation changes, and public spending plans.
Richard Carter from Quilter Cheviot anticipates that the economy will continue on its current moderate growth trajectory, supported by wage growth outpacing inflation and recent monetary policy adjustments.
