U.K. GDP Grows 0.9% as Strength of Recovery Revised Up

By Fergal O’Brien and Andrew Atkinson

Photographer: Chris Ratcliffe/Bloomberg

The data may also bolster the argument of Chancellor of the Exchequer George Osborne... Read More

The U.K. economy grew faster than estimated in the second quarter, extending a recovery that’s been more robust than previously thought.
Gross domestic product rose 0.9 percent in the three months through June, the fastest pace in nine months and above the 0.8 percent previously published, the Office for National Statistics said today. A separate report showed the nation’s current account deficit widened.
Revisions showed the recession that started in 2008 was shallower than initially estimated and the bounce-back stronger, with
output recovering its pre-recession peak in the third quarter of last year. GDP is now 2.7 percent higher than it was at the start of 2008.
The changes to the data may strengthen the case for Bank of England policy makers that it’s time to begin raising interest rates from a record low. While the BOE kept the benchmark rate at 0.5 percent this month, two officials are pushing for an increase. In nominal terms, the economy is now 28 billion pounds ($45 billion), or 6.6 percent, bigger than previously estimated.
The pound appreciated 0.4 percent to 77.80 pence per euro at 11:13 a.m. London time. Sterling fell 0.2 percent to $1.6205.
During the recession, the economy shrank 6 percent, less than the 7.2 percent previously reported. It grew faster than previously thought between 2010 and 2012, and by an unrevised 1.7 percent in 2013.
James Knightley, an economist at ING Bank NV in London, said the stronger recovery could mean there is less spare capacity in the economy.

Rate Forecast

“Taken on its own this could suggest that the U.K. may need to raise rates earlier and more aggressively,” he said. “But in the absence of inflation and wage pressures and with signs that the housing market is cooling we doubt that the Bank of England will move imminently.”
Investors have fully priced in a rate increase by June 2015. Knightley forecasts that the BOE will begin tightening in February.
The data may also bolster the argument of Chancellor of the Exchequer George Osborne that his deficit-cutting plan was the best one for the economy after the recession. With a general election due next year, he told the annual conference of his Conservative Party yesterday that “difficult decisions” are still needed to fix the economy, which faces “huge” risks.
In a statement today, the Treasury in London said the ONS report is “further evidence that government’s long-term economic plan is working.” The changes to the data also have an impact on the deficit-to-GDP ratio, which is now said to be 5.7 percent compared with 6.5 percent previously.

Consumer Squeeze

The GDP figures showed the squeeze on household budgets may be easing. Wages and salaries rose 1.9 percent in the second quarter, faster than the rate of consumer-price inflation. Adjusted for inflation, disposable income increased 2.2 percent, the biggest increase in a year.
Households were able to set aside more of their income, with the savings ratio rising to 6.7 percent from 5.7 percent in the three previous months, the report showed.
Consumer spending rose 0.6 percent after a 0.7 percent advance in the previous three months. Government spending increased 1 percent and business investment jumped 3.3 percent. Exports fell 0.4 percent, imports declined 0.3 percent and net trade made no contribution to GDP in the quarter.
In a separate report, the statistics office said the current account deficit widened to 23.1 billion pounds from 20.5 billion pounds in the previous three months. The first-quarter deficit was revised from 18.5 billion pounds.