InvestmentsAug 10 2018

UK economic growth doubles in second quarter

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UK economic growth doubles in second quarter

The pace of UK GDP growth doubled in the second quarter of 2018, reaching 0.4 per cent in the three months to the end of June.

The data released by the Office for National Statistics this morning (10 August) revealed GDP growth was in line with market expectations.

It also showed the UK was growing faster than the Eurozone, which registered GDP growth of 0.3 per cent in the same quarter.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the economy was to some extent "bailed out" by one off events such as the warm weather, the Royal Wedding and the World Cup, but he warned these events could not be relied on to continue making up for the structural weaknesses in the economy.

He pointed to the weak wage growth seen in the UK which would probably mean the "squeeze" on discretionary spending would continue.

Mr Khalaf said: "The shackles are still on the UK economy, and that spells more of the same in terms of interest rate policy for the foreseeable future."

The underlying data told a mixed tale, with the manufacturing sector in recession but business investment, which was negative to the tune of 0.4 per cent in the first quarter, swinging positive by 0.5 per cent.

Growing business investment should be positive for the economy in the coming months because if firms are deploying capital on big ticket items, it implies they will then either buy stock and raw materials or hire more workers to use those big ticket items.

The decline in manufacturing coincided with a period of strength for sterling, with stronger sterling making UK exports more expensive.

Sterling fell against its peer currencies more recently, reaching $1.27, and the link between manufacturing and the performance of sterling can be seen in the ONS data, which revealed manufacturing growth returned in June, the final month of the quarter, as sterling was weaker.

Manufacturing in the Eurozone, in contrast, was weaker in June as its currency was stronger.

Chris Beauchamp, chief market strategist at IG Group said the better GDP data had not contributed to a stronger pound. He noted sterling had dropped to its lowest level for 12 months against the dollar.

He said this was partly a function of the dollar being strong, and partly of fears of the consequences of Britain leaving the European Union without a deal.

david.thorpe@ft.com