Full story: UK economy grows faster than expected after surprisingly strong June
![Jasper Jolly](https://i.guim.co.uk/img/uploads/2020/02/24/Jasper_Jolly.png?width=300&quality=85&auto=format&fit=max&s=379cc2ade345d9eb794745e2cebc7e1b)
Jasper Jolly
The UK economy grew faster than expected in the second quarter of this year after growth was boosted by a recovery in car manufacturing and a surprisingly strong June.
UK GDP increased by 0.2% in April to June, up from 0.1% in the previous three months and the best quarterly reading in more than a year, according to the Office for National Statistics (ONS).
The data surprised economists, with a poll of them beforehand forecasting no growth in output during the quarter. The reading was helped by an unexpectedly strong performance in June, when output rose by 0.5%. GDP had fallen by 0.1% in May because of an extra bank holiday to celebrate the coronation of King Charles after growth of 0.2% in April.
However, the UK economy still remains 0.2% smaller than it was in the final quarter of 2019, before the onset of the coronavirus pandemic triggered the deepest recession on record.
The cost of living crisis period of the last 18 months remains the weakest period outside a recession for 65 years, the Resolution Foundation thinktank pointed out, despite the UK economy dodging a technical recession of two consecutive quarters of declining GDP.
Darren Morgan, an ONS director of economic statistics, said:
“The economy bounced back from the effects of May’s extra bank holiday to record strong growth in June. Manufacturing saw a particularly strong month, with both cars and the often-erratic pharmaceutical industry seeing particularly buoyant growth.
“Services also had a strong month, with publishing and car sales and legal services all doing well, though this was partially offset by falls in health, which was hit by further strike action. Construction also grew strongly, as did pubs and restaurants, with both aided by the hot weather.”
You can read more here:
Key events
CEBR: UK recession projected for later in the year
The CEBR thinktank predict the UK economy will decelerate this year, and fall into recession.
Not what Rishi Sunak will be hoping for ahead of the general election.
But Sam Miley, managing economist at the CEBR warns that higher interest rates will hit growth
“Though GDP picked up in Q2, it should be noted that growth remains poor by historic standards. The future outlook is also weak, with the economy continuing to face several headwinds, notably the impact of tighter monetary policy.
Cebr expects quarterly growth to decelerate in Q3. Contractions are then projected for the subsequent two quarters, marking a technical recession.”
This would also be a blow to efforts to catch up with other G7 nations:
How does the UK economy today compare to just before the pandemic?
We are *still* 0.2% below our pre-pandemic level of GDP – the only G7 country in that position. pic.twitter.com/1V0nlxgOwm
— Resolution Foundation (@resfoundation) August 11, 2023
Here’s a decent chart showing how G7 economies have fared since Covid-19:
British GDP data got released today (+0.2%), which means another update to my G7 growth chart
Compared to before the pandemic, here’s how GDP has changed by country:
US +6.7%
Canada +4% (through Q1)
Italy +1.4%
France +1.3%
Germany +0.5%
UK -0.3%
Japan -1.1% (through Q1) pic.twitter.com/jYp61k8wuz— Joey Politano 🏳️🌈 (@JosephPolitano) August 11, 2023
Over in the US, producers have raised their prices faster than expected – in a blow to hopes of a ‘soft landing’ for America’s economy.
The Producer Price Index for final demand, which tracks what firms charge for their goods and services, rose by 0.8% in the year to July.
In July alone, prices rose by 0.3%, having fallen by 0.3% in May and been flat in June – which may raise concerns that US inflation has bottomed out.
US July PPI:
– m/m +0.3% (est +0.2%, last +0%)
– m/m core +0.3% (est +0.2%, last -0.1%)
– y/y +0.8% (est +0.7%, last +0.2%)
– y/y core +2.45 (est +2.3%, last +2.4%)PPI probably bottomed in May and now recovering pic.twitter.com/IE2TJLNc1G
— Mario Cavaggioni (@CavaggioniMario) August 11, 2023
The Producer Price Index (#PPI) rose 0.3% in July vs expectations of +0.2%. While the PPI rose slightly faster than expected, this indicator was lower in 5 of the last 8 months and is up by a subdued 0.8% Y/Y. The peak was +11.7% Y/Y in March 2022. pic.twitter.com/pb2nWjEq3b
— Cetera Investment Management (@ceteraIM) August 11, 2023
Net trade had a negative impact on UK growth in the last quarter.
Export volumes fell by 2.5% in April-June, including a 0.8% fall in goods exports (mainly due to gold movements) and a 4.0% fall in services exports.
The fall in services exports was driven mainly by other business services, with decreases in advertising and market research, management consulting, and other trade in services.
Import volumes increased by 1.0% in the latest quarter, driven by a 1.7% increase in goods imports such as cars and aircraft.
![A Pimms O'Clock sign outside a pub in Henley. The town of Henley on Thames in Oxfordshire in June.](https://i.guim.co.uk/img/media/f9e60f4798509e68553c31177062fb72d39fe99c/0_277_4800_2879/master/4800.jpg?width=465&dpr=1&s=none)
The ONS suspects that decent weather in June helped the UK’s service sector to grow during the month.
The second-largest positive contribution to growth was from accommodation and food service activities which increased by 1.6%.
The ONS says:
This was driven by food and beverage services which saw a particularly strong month in June, with anecdotal evidence from the monthly business survey suggesting that good weather and an increase in live events boosted turnover for businesses.
The largest positive contribution to growth was from the information and communication sub-sector which grew by 1.0%, with the biggest increases in motion picture, video and TV programme production, and computer programming, consultancy and related activities.
Julian Jessop, economics fellow at the right-wing Institute of Economic Affairs, points out that today’s GDP report is good news for the PM:
One at least of Rishi Sunak’s five pledges is being met: “we will grow the economy”… 👇
(not a high bar of course, but the UK continues to dodge the #recession that many predicted) pic.twitter.com/VGL2sCNGpS
— Julian Jessop (@julianHjessop) August 11, 2023
Interestingly, June was the first month since last October in which the UK’s services, production and construction sector all grew.
A reminder: Output growth in the services sector was 0.2% in June, while production expanded by 1.8%, and construction output grew 1.6%.
![A chart showing how the production sector was the main contributor to the growth in GDP in June 2023](https://i.guim.co.uk/img/media/e7b5e286ba8af1573ae5a4c657a0db0013af51c1/0_0_700_549/master/700.jpg?width=465&dpr=1&s=none)
While strong manufacturing growth boosted production, the construction sector benefited from increases in both new work (2.0%) and repair and maintenance (1.1%) compared with May (when bank holidays hit output).
June breaks 3 consecutive periods of negative growth in monthly construction output, increasing 1.6% in volume. This monthly increase was largely driven by infrastructure new work and non-housing repair and maintenance @ONS pic.twitter.com/MWV9xlIxO1
— Emma Fildes (@emmafildes) August 11, 2023
NIESR, the economic research group, have predicted the economy will keep growing in the current quarter – by 0.3%.
Having analysed today’s GDP report, they say:
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Monthly GDP grew by 0.5 per cent in June following a contraction in growth by 0.1 per cent in May. This monthly figure was driven both by a weaker-than-normal May performance due to the extra bank holiday, as well as stronger-than-expected growth in production and construction.
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GDP grew by 0.2 per cent in the second quarter of 2023 relative to the previous quarter, higher than we had forecast last month. However… the economy has largely flatlined following the initial stages of post-pandemic recovery; today’s monthly GDP is estimated to be only 0.8 per cent above its pre-pandemic (February 2020) level.
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Our early forecast for the third quarter of 2023 expects GDP to grow by 0.3 per cent, remaining broadly consistent with the longer-term trend of low, but stable, economic growth in the United Kingdom. That said, as persistently high inflation continues to squeeze household budgets, alongside the effects of the high cost of borrowing, demand will be curbed in the near term. As a result, service-sector output in particular may falter and drag down on GDP in the coming months. The risks to GDP at the moment thus continue to be skewed downside.
⚡️OUT NOW⚡️ Our latest monthly #GDP Tracker expects GDP to grow by 0.3 per cent in the third quarter of 2023, remaining broadly consistent with the longer-term trend of low, but stable, economic growth in the UK 📊
👇Read here in full 📉https://t.co/oBx1qtE8dn pic.twitter.com/Htb9DDtwy1
— National Institute of Economic and Social Research (@NIESRorg) August 11, 2023
BCC: UK economy is in a precarious place
The UK economy remains in “a precarious place” despite beating expectations in the last quarter, warned David Bharier, head of research at the British Chambers of Commerce, this morning.
Businesses are continuing to face a worrying mix of high inflation, rising interest rates, a tight labour market, and global economic uncertainty.
While the UK remains on course to avoid a technical recession, small movements in one direction or the another won’t mean much for many firms facing the toughest trading conditions in years, Bharier pointed out, adding:
“Our latest Quarterly Economic Survey shows that most SMEs continue to report no improvement to investment, cash flow, or sales. Worryingly, 41% of businesses are now concerned about the impact of rising interest rates.
“UK businesses are very adaptable, but they are looking for clear direction from the government and the Bank of England, particularly on interest rate policy and a long-term plan to unlock investment.
Business investment boom underway in UK
Analysts at Berenberg Bank are encouraged that UK business investment rose in the last quarter, by 3.4%, as this chart shows:
![A chart of UK business investment](https://i.guim.co.uk/img/media/6c7f437c365425796f1fcd5555673d75da117aaa/0_0_961_658/master/961.jpg?width=465&dpr=1&s=none)
This has ben a long-running problem for the economy – but they believe a “business investment boom” is now underway:
Holger Schmieding, Berenberg’s chief economist, explains:
Productivity-enhancing business investment stalled badly after the UK voted to leave the EU, and then collapsed during the first wave of COVID-19 in early 2020. The weakness in investment has hurt productivity, harmed supply potential and contributed to inflation pressures.
However, the latest data indicate that the post-COVID snapback in investment may be turning into a genuine investment boom. Business investment has surged by 35% from the Q2 2020 low and is now 6% above its pre-Brexit-vote high.
Despite a rising cost of capital, cash balances worth c25% of GDP and corporate debt-to-GDP at a 25-year low provide businesses with ample space to raise investment spending, while rising labour costs and pricing power in final markets provide an incentive to do so. Fading political uncertainty, combined with economic recovery, can underpin further strong investment gains.
UBS ditches £8bn state backstop for Credit Suisse deal
![Kalyeena Makortoff](https://i.guim.co.uk/img/uploads/2022/02/22/Kalyeena_Makortoff,_L.png?width=300&quality=85&auto=format&fit=max&s=c22ec0845321415da97518e6e74376e1)
Kalyeena Makortoff
In the banking world, UBS has terminated a 9bn Swiss franc (£8bn) government lifeline, and repaid billions of pounds worth of loans to the Swiss central bank, as part of efforts to rid itself of taxpayer support following its emergency rescue of rival Credit Suisse in March.
The lender said it had completed a “comprehensive assessment” and “severe” stress test of Credit Suisse assets, which showed it did not need the £8bn loss protection agreement (LPA).
The deal would have seen taxpayers absorb losses beyond the first 5bn Swiss francs, which UBS would have to take on.
“At the time, this was deemed necessary to protect UBS against potential tail risks as there had been very limited time to review respective assets over the rescue weekend. After reviewing all assets covered by the LPA since the closing in June and taking the appropriate fair value adjustments, UBS has concluded that the LPA is no longer required.”
UBS also announced today that it had turned down a 100bn Swiss franc (£89bn) liquidity lifeline from the Swiss National Bank, and that Credit Suisse has paid back 50bn Swiss francs worth of emergency funding to the central bank, bringing an end to the deal’s controversial state support.
Swiss authorities orchestrated UBS’ takeover of Credit Suisse in March, in order to stem a crisis of confidence in the global banking sector that led to the collapse of three US lenders. The merger drew criticism, including from Credit Suisse shareholders, who called for board members to be “put behind bars” following the bank’s failure.
UBS is expected to reveal more details about the progress of the merger on 31 August when it releases its Q2 results.
Reuters has seen an internal memo to UBS staff, saying:
“It should be clear to all of us that we still have a lot of work ahead of us to realize the full potential value from this transaction.”
Today’s GDP report could be “as good as it gets” for a while, warns Rob Morgan, chief investment analyst at wealth manager Charles Stanley:
“Having eked out 0.1% growth in the first quarter of this year, today’s second quarter UK GDP numbers showed an improvement on the previous two quarters. June was particularly buoyant, reflecting a rebound from a May peppered with bank holidays.
“Although the UK economy didn’t exactly smash forecasts of a flat period, it is sufficiently robust enough to give the Bank of England MPC plenty of food for thought at its next meeting to decide interest rates on 21st September. Their judgement will be a difficult one with inflation pressures lingering and the UK economy so far largely withstanding the strain of higher rates.
“Economic activity has held up pretty well with a softening in raw materials prices helping spur demand. However, GDP is a lagging indicator and this could be as good as it gets for a while as some key tailwinds fade. Consumer spending has been helped along by lower fuel prices alongside low unemployment levels and wage growth above 7%. With much of the drag from higher interest rates yet to be felt there is still a risk the economy could tip into recession in the second half of this year.”
FTSE 100 falls 1% after GDP report
The good news on UK growth this morning is going down a little badly in the City.
The blue-chip share index, the FTSE 100, has dropped by 1% or 76 points to 7542 points.
Investors appear concerned that the better-than-expected GDP figures could encourage the Bank of England to keep raising interest rates.
John Choong, equity and markets analyst at investing comparison platform, InvestingReviews.co.uk, explains:
“The FTSE 100 opened in the red this morning as markets were spooked by strong services data in the GDP figures. This may spur more rate hikes than markets expected, with the Bank of England handed more room to do so without triggering a recession given the economy’s strength.
As such, housebuilder stocks, which are sensitive to interest rate futures, are on the decline again with gilt yields taking a jump.
AJ Bell investment director Russ Mould says:
“Before we roll out the garlands it is worth observing the UK remains one of the few major economies to reach its pre-pandemic size. This is a story of resilience rather than dynamism.
The durability of the economy is a double-edged sword as it may lead the Bank of England to keep taking a hard line on interest rates. Given the lagged impact of rate increases, which have already seen borrowing costs increase from near zero to more than 5% in a little over 18 months, this could result in a more significant downturn at some point down the line.
“On the other hand, a lower than anticipated inflation number next week could build confidence in a Goldilocks scenario where the economy is blowing neither too hot or too cold and the Bank can start to dial back the pressure on rates and avoid inflicting much more pain without risking losing control of prices again.”
European stock markets are also in the red, with Germany’s DAX and Italy’s FTSE MIB both down 0.5%.
Data from China, showing the new loans plunged to their lowest since 2009, have added to concerns over the world’s second-largest economy.
Sunak: We are making progress
Rishi Sunak has claimed the government’s plan was working, after this morning’s GDP figures showed the UK economy grew by 0.2% in the second quarter of the year.
Sunak said:
This is good news. At the beginning of the year I made growing the economy one of my top priorities, and we are making progress.
“There’s still more work to do, but today’s figures show the plan is working.”
This is good news.
At the beginning of the year I made growing the economy one of my top priorities, and we are making progress.
There’s still more work to do, but today’s figures show the plan is working. https://t.co/o1Lab1YSdy
— Rishi Sunak (@RishiSunak) August 11, 2023
The PM will obviously be relieved that the downturn that was feared last winter has been avoided, although some economists do predict the economy could still drop into a recession (see earlier post).
Also, quarterly growth of 0.2% is still weak in historic terms. Over 1980 to 2014, for example, real GDP growth averaged 2.2% per year.
Resolution Foundation have published a thread on today’s UK GDP report:
🚨 Latest UK GDP data 🚨
The @ONS data released this morning shows the UK economy is continuing its resilience in the face of the cost of living crisis.
It exceeded expectations for flat growth by expanding 0.2% on the quarter. But the big picture is not so rosy… 🧵 pic.twitter.com/ARBseiNY02
— Resolution Foundation (@resfoundation) August 11, 2023
A few months ago pretty much everyone thought we’d be in a recession by now.
Despite the ongoing cost of living crisis, growth has proved more resilient than expected. pic.twitter.com/ZvfSQl22VO
— Resolution Foundation (@resfoundation) August 11, 2023
So, why is the economy still growing?
Growth was especially strong in June (0.5%!) as the economy bounced back from the coronation-induced contraction in May. pic.twitter.com/UxJWZVEEUj
— Resolution Foundation (@resfoundation) August 11, 2023
If we break this down, it looks like manufacturing made a key contribution to growth, and within services ICT was punching above its weight.
In terms of expenditure, it’s clear that household and government spending are what’s holding growth up. pic.twitter.com/kpS4pIVaaF
— Resolution Foundation (@resfoundation) August 11, 2023
To put that in the context of the rest of Europe, we’ve got the *highest* inflation and the *second lowest* growth (just in front of Germany which went into recession this year). pic.twitter.com/jFHxkJhUhv
— Resolution Foundation (@resfoundation) August 11, 2023
So what’s next? Forecasts aren’t bright.
Many (including the @bankofengland) expect that GDP will continue to stagnate for years.
Make no mistake – this might not be a technical recession but we are experiencing the weakest growth for 65 years outside of one. pic.twitter.com/MRNCN4seVQ
— Resolution Foundation (@resfoundation) August 11, 2023
We’ve faced repeated set backs in the form of the financial crisis and the pandemic, and our economy is still more than 20% below its pre 2008 trend. pic.twitter.com/vdwBV51RCY
— Resolution Foundation (@resfoundation) August 11, 2023
Tomasz Wieladek, chief European economist at investment management firm T. Rowe Price, agrees that today’s GDP data bolsters the prospects of further increases in interest rates.
Wieladek says:
UK June GDP data surprised to the upside this morning growing by a punchy 0.5% relative to expectations of 0.2%. There was a large upside surprise in Manufacturing growth, growing by a very large 2.4% on the month, relative to expectations of 0.2% growth.
Construction output, a category that is normally interest rate sensitive, rose by 1.6% against expectations of no growth. Services grew by 0.2% in June, in line with expectations.
Nevertheless, it is striking that the most interest sensitive categories, manufacturing and construction, saw such a large rebound in June. This suggests that the rate hikes this year are not yet fully weighting on growth data as expected.
UK still facing ‘mild recession’, warns Capital Economics
Capital Economics, the City consultancy, are sticking with their forecast that the UK is heading for a mild recession later this year.
Ruth Gregory, their deputy chief UK economist, told clients that the 0.5% rise in GDP in June was mostly due to the return to the normal number of working days in June after May’s bank holiday for the King’s Coronation.
Thus, it makes the economy look stronger than it really is.
Gregory added:
Overall, the bank holiday, unusually warm weather and strikes make it hard to judge the true health of the economy. But our sense is that underlying activity is still growing, albeit at a snail’s pace. We still think that with most of the drag from higher interest rates still to come, GDP will fall in Q3 and a mild recession will begin.
That may not prevent the Bank from raising interest rates from 5.25% now to 5.50% in September. But it may mean that rates don’t rise as far as the 5.75-6.00% envisaged by the consensus and investors.