Houses in Whitby, Yorkshire, U.K.
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The U.K. economy expanded by a better-than-expected 0.3% in the second quarter, according to preliminary estimates from the U.K.’s Office for National Statistics out on Thursday.
Economists polled by Reuters had expected the country’s gross domestic product (GDP) to expand by a tepid 0.1% over the period, up from bumper growth of 0.7% in the first quarter.
Month-on-month, the economy grew 0.4% in June after a 0.1% contraction in May, failing to shake off the impact of U.S. tariffs and business uncertainty.
“The economy was weak across April and May, with some activity having been brought forward to February and March ahead of Stamp Duty and tariff changes, but then recovered strongly In June,” Liz McKeown, director of Economic Statistics at the ONS, commented Thursday. Stamp duty refers to a tax on property purchases.
Across the broader second quarter, growth was led by services, with computer programming, health and vehicle leasing gaining momentum. Construction also increased, while production fell back slightly. Quarterly growth was also boosted by updated source data for April which, while still showing a contraction, was better than initially estimated, the ONS said.
“Services also drove growth in June with scientific R&D, engineering and car sales all having a strong month. Within production, which recovered, manufacture of electronics performed especially well,” McKeown noted.
The British pound was flat against the dollar after the data release, at $1.3577.
After a strong start to the year, the U.K. economy “took a breather” in the second quarter, George Brown, senior economist at Schroders, said in emailed comments following the data release.
“Much of the slowdown reflects a drop in manufacturing following tariff frontloading in Q1. This drag should ease in the third quarter, even against a tougher global trade backdrop.
“Still, hopes of a sharp rebound are likely to be dashed. The labour market has softened, and capacity constraints mean even tepid growth is generating inflation pressures. With this in mind, we expect the Bank of England to keep rates on hold for the remainder of the year,” he noted.
The latest growth data comes days after the Bank of England cut interest rates from 4.25% to 4%, with policy makers weighing sticky inflation — which rose to a hotter-than-expected 3.6% in June from 3.4% in May — against a cooling jobs market and lackluster growth.
In a statement last week, the BOE said its monetary policy committee “remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term.”
It also noted that underlying UK GDP growth “has remained subdued, consistent with a continued, gradual loosening in the labour market.”
“A margin of slack is judged to have emerged in the economy. Downside domestic and geopolitical risks around economic activity remain, although trade policy uncertainty has diminished somewhat,” the bank said, factoring in the U.K.’s trade deal with the U.S. and baseline 10% tariff on its exports to the States.
The MPC was initially split on reducing or holding interest rates with four members wanting to hold rates, four others voting to cut and one policymaker voting for a larger 50-basis-point cut. The committee then held a second round of voting to arrive at a majority decision to cut rates by 25 basis points.
The voting is a reflection of the “finely balanced situation” the MPC currently faces in terms of the factors driving monetary policy, according to BOE Governor Andrew Bailey.
“There’s an upside risk to inflation, and particularly as to whether… this current increase could persist somewhat more than we expect it to. We don’t expect it to actually, but could it?” Bailey told CNBC’s Ritika Gupta in an interview. “But… that has to be set in the context of the labor market conditions, which appear to be softening.”
