The UK economy saw unexpected growth in the second quarter and became the only advanced economy to regain pre-COVID levels of economic activity.
Official data showed the economy grew 0.2% in the second quarter, against the consensus for a flat reading in a Reuters poll of economists. The performance was helped by monthly growth of 0.5% in June.
Pound up on the news
The surprise news sent the pound up in value against the US dollar and Euro, as well as shrugging off fears of a major recession this year.
Yet former member of the Bank of England’s monetary policy committee Andrew Sentance told Sky News that the figures show the UK is set for “fairly slow growth.”
The growth vindicates interest rate hikes
The growth also vindicates the 14 consecutive Bank of England interest rate hikes, to tackle inflation which means there may be more. The Bank of England raised interest rates to 5.25% last week – the highest level since 2008. There are fears the interest rates may hit 6% next year.
The surprise growth figure has bolstered chances of another interest rate rise because it shows the economy has resilience. The central bank has stressed that resilience in the economy underpins decisions on whether to hike interest rates.
Some economists have criticised these rises arguing that inflation is not from consumer spending, but due to external factors like the increase in grain prices due to the war in Ukraine.
Bank of England has a headache
“It gives the Bank of England a headache – they may well have been thinking about pausing interest rate increases soon, but this data will make that more difficult,” said fund manager Neil Birrell from asset managers Premier Miton.
British government bond yields shot higher after the market opened as investors digested the data.
The Office for National Statistics said businesses had cited an additional national holiday in May as a factor for the increased output in June, compared to May.
