Schroders Senior European Economist, Azad Zangana (pictured), comments on the preliminary UK GDP figures…
The preliminary estimate for GDP showed the UK economy rebounded in the second quarter, following a disappointing start to the year. Real GDP growth picked up to 0.7 per cent in the three months to June, an improvement compared to the 0.4 per cent growth recorded for the previous quarter.
The pickup in activity was driven by an improvement in industrial production, where growth in the mining and quarrying industry picked up sharply. Manufacturing which is a sub-sector of industrial production, contracted over the quarter, highlighting the difficulties manufacturers are facing with the strength of sterling hitting export demand. The services sectors also improved, especially business services and finance. Otherwise, construction activity was flat during the period.
Overall, the latest GDP figures suggest that the economy is performing strongly and should continue to create more jobs, putting upward pressure on wages. We forecast the pace of growth to remain similar until the turn of the year, before austerity starts to slow activity. As for the Bank of England, with external concerns such as Greece subsiding, the Monetary Policy Committee will be seriously considering whether it is time to start raising interest rates. We expect the Bank to hold fire until early next year, as inflation is currently too low. However, once the Bank starts to hike rates, we expect them to move at a faster pace than markets are currently pricing, which may put further upward pressure on sterling, and potentially have a negative impact on UK equities, given the importance of overseas earnings.