UK: Recovery Gains Momentum

Consensus Forecasts

Revised data from the ONS show that the economy expanded 0.7% (q-o-q) in Q2 following an initial 0.6% estimate. This revision stemmed largely from upgrades to manufacturing and construction output which advanced by 0.7% (q-o-q) and 1.4%, respectively. The expenditure-based breakdown of the Q2 national accounts reported a 0.4% (q-o-q) increase in household consumption while gross fixed capital formation accelerated modestly to 1.7%. Net trade also bolstered activity as exports of goods and services surged by 3.6% (q-o-q), their largest rise since Q4 2011. Robust services output has driven growth this year, and the largest jump in new business since May 1997 helped the PMI for the sector climb to 60.5 in August. Elsewhere, industrial production flatlined in m-o-m terms in July as warmer weather curbed demand for energy. The recent raft of encouraging news about the country’s economic recovery has sparked an increase in consumer confidence, as reflected in a greater-than-anticipated 1.1% (m-o-m) rise in July retail sales. Real earnings, however, remain significantly below pre-crisis levels, and boosting living standards is set to be a pivotal topic going into the 2015 general election. The consensus for 2013 GDP has been upgraded this month, but growth is to remain below potential for some years to come.

Bank of England governor Mark Carney last month unveiled fresh measures to spur UK lending and signalled that the central bank is prepared to inject additional stimulus if the recovery falters. Net lending to businesses continued to fall in Q2, however. Carney also announced that banks which meet the BoE’s strict capital requirements will be able to reduce their liquid assets in order to fund new loans.

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