UK growth at 4-yr high, recovery doubts allayed
Britain's economic recovery raced ahead from April to June as the biggest jump in construction in half a century and a surge in services propelled growth at its fastest pace in four years.
Gross domestic product jumped 1.1 percent in the second quarter, data from the Office for National Statistics showed. That was almost twice the rate analysts expected and nearly four times the pace of growth in the first quarter.
Friday's figures suggested Britain's recovery was on a firmer footing than many feared, easing concerns that deep public spending cuts could drive the economy back into recession, though some said growth may lose momentum in the third quarter.
The pound jumped more than half a cent against the dollar and interest rate futures plunged as investors questioned how long the Bank of England would keep interest rates at their record low, particularly with inflation so far above target.
BoE policymakers discussed injecting more stimulus into the economy this month for the first time since February, reflecting concerns over headwinds from the euro zone debt crisis, bank lending constraints and fiscal tightening.
But concern about price pressures has led Monetary Policy Committee member Andrew Sentance to vote for a quarter-point rise in rates for the last two months, and analysts said Friday's data may persuade others on the MPC to join him.
The strong growth registered in Q2 suggests that further policy loosening may be unnecessary, and may help to swing the debate in favour of those arguing that the economy is sufficiently robust to withstand some modest policy tightening, said Simon Hayes, economist at Barclays Capital.
AS GOOD AS IT GETS?
Finance minister George Osborne said the figures were evidence that the private sector would be able to fill the gap left by public spending cutbacks.
Today's figures show the private sector contributing all but 0.1 percent of the growth in the second quarter, and put beyond doubt that it was right to begin acting on the deficit now, he said.
But analysts cautioned that growth could lose momentum in the second half of this year.
Separate figures on Friday showed banks were still not lending freely, suggesting households and businesses may find it hard to make up for the expected drop in government spending.
Even with the second quarter bounce, Britain has recouped around only a quarter of the output lost during the deepest recession since World War Two, which wiped 22 billion pounds off the economy.
My hunch is that Q3 is certainly not going to be as good as this, said Amit Kara, economist at UBS, who said the government's forecast for 1.3 percent growth this year still looked optimistic. This is about as good as it gets.
A breakdown of the figures showed the services sector enjoyed its fastest growth in three years, expanding by 0.9 percent on the quarter -- three times as fast as in Q1 and contributing 0.7 percentage points to growth.
Manufacturing grew 1.6 percent, its biggest rise in more than 10 years.
Construction leapt 6.6 percent on the quarter -- its fastest rate since 1963, rebounding after weather-related weakness at the start of the year.
However, analysts urged caution in interpreting the figures, which were based for the first time based on a new monthly survey.
There was a surprising pick up in new work in the private sector -- we would question how plausible this is, said Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club. (Additional reporting by Matt Falloon and David Milliken; Editing by Patrick Graham and Hugh Lawson)
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