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The UK economy unexpectedly showed growth in the second quarter, laying the groundwork for further interest rate hikes by the Bank of England, but it remains the only major economy that has yet to recover the levels that preceded the economic crisis of late 2019.
Official data released on Friday showed the economy grew by 0.2% in the second quarter, contradicting economists‘ early forecasts. The data led to a sharp rise in sterling against the US dollar and euro.
The strong figures have bolstered bets that the Bank of England will continue to raise interest rates, as it emphasised this month that the strength of the economy is one of the factors on which it will base its decision. The central bank itself had forecast the economy to grow at 0.1% in the second quarter.
Now the Bank of England has a new headache — they may well have paused interest rate rises in the near future, but with such data it is much harder to do so, experts say.
British government bond yields rose after the market opened while investors were digesting the data.
Manufacturing recorded its best quarter since the start of 2019, aside from the initial rebound after the first COVID-19 lockout of 2020, with output up 1.6% quarter-on-quarter. Business investment also rose 3.4% for the quarter.
„The measures we are taking to tackle inflation are starting to work, which means we are laying the solid foundations we need to grow the economy,“ said Treasury Secretary Jeremy Hunt.
Although Britain, unlike the eurozone, has so far managed to avoid recession, the data confirmed the relatively poor performance of its economy since the start of the COVID-19 pandemic.
At the end of the second quarter, the British economy was 0.2% below year-end 2019 levels, compared to growth of 0.2% in Germany, 1.7% in France, 2.2% in Italy and 6.2% in the US.
