Warm weather and World Cup boosts GDP growth

Warm weather and World Cup boosts GDP growth

The UK economy grew 0.2 per cent in the three months to the end of May, predominantly driven by the performance of the services sector, according to latest data from the Office for National Statistics (ONS).

The data shows the same pace of growth as in the first quarter of 2018, although the 0.2 per cent recorded for the first three months of the year was actually an upgrade on the initial estimate of 0.1 per cent.

The ONS stated the services sector made the largest contribution to growth in the most recent quarter, while the construction and industrial sectors declined.

The three months to the end of May marked a period where sterling was relatively strong compared with previous quarters. A rise in the value of sterling is bad for UK exporting businesses, as it makes the goods they sell more expensive.

At a speech in Newcastle last week, Bank of England governor Mark Carney said the UK economy is growing broadly in line with the central bank’s expectations, and he implied interest rates will rise in the near future if the UK has an orderly exit from the EU. The governor's comments were made prior to the events of recent days, when the UK's Secretary of State for Brexit and Foreign Secretary both resigned in disagreement with the policy of the UK government on Brexit. 

Data from the Barclays Consumer Spending Report shows discretionary consumer spending, that is spending on items over which the consumer has a choice of whether to buy or not, rose by 5.5 per cent in June, the fastest rate of growth for 18 months.

Laura Suter, personal finance analyst at AJ Bell, said the warm weather and the excitement about the World Cup was behind the rise in consumer spending.

Ben Brettell, senior economist at Hargreaves Lansdown, said: “The economy grew 0.2 per cent in the quarter to May. This was in line with economists’ forecasts, and represents a significant rebound from a disappointing start to the year.”

He added: “While the news is undoubtedly positive, the usual concerns will no doubt surface around the bias towards the service sector, which drove the growth. Industrial production and construction both fell in the quarter, though the latter rebounded slightly in May."

Mr Brettell said the good news on growth brings the Bank of England’s August policy meeting into sharp focus.

"Markets are now pricing in an 78 per cent chance of a rise. But I still think there’s a significant chance of a no change decision," he said.

"The second quarter is likely to see a small uptick in GDP, but when added to the below par first quarter, this means growth in the first half of the year will be decidedly sub-trend.

"I can’t see how this makes a particularly strong case for higher rates at present, particularly as Brexit uncertainty casts an increasingly threatening shadow.”