UK: Faster Growth, But Recovery Tentative


GDP growth quickened to a three-year high of 0.7% (q-o-q) in Q2, aided by a jump in disposable personal income after some workers deferred bonus payments until April to take advantage of a one-off tax cut. Household consumption consequently boosted activity, advancing by 0.3% (q-o-q) and by 1.8% (y-o-y). However, the surge in exports was less pronounced than initially estimated, translating into net trade having no impact on quarterly growth. Gross fixed investment was also downgraded, from 1.7% (q-o-q) to 0.8%, and continued to plummet in y-o-y terms, raising concerns about the sustainability of the recovery. Still, buoyant activity in the services sector suggests that Q3 GDP growth (which will be released on October 25) likely outstripped the 0.7% (q-o-q) figure reported in Q2. A resurgent housing market helped the services PMI register 60.3 in September, rounding off its strongest quarter since Q2 1997. Mortgage approvals rose to a five-year high in August, and the government looked to maintain this upward momentum by launching a new initiative earlier this month aimed at getting people onto the property ladder. However, house prices – particularly in London and the South-East – are rising markedly, and some observers fear that the scheme could induce another housing market bubble. Elsewhere, industrial production unexpectedly contracted by 1.1% (m-o-m) in August, failing to mirror the strength of recent business surveys.

The Bank of England left monetary policy unchanged on October 9, although stubbornly high inflation and recent broad-based gains in employment could bring forward a possible hike in interest rates. The CPI edged down to 2.7% (y-o-y) in August, from 2.8% in July.


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