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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK economy avoids stagnation with 0.2% growth between April and June – as it happened

United Kingdom GDP Economy United States
Office workers and commuters walking through Canary Wharf in London during the morning rush hour.
Office workers and commuters walking through Canary Wharf in London during the morning rush hour. Photograph: Victoria Jones/PA

Closing post

Time for a recap.

Fears that the UK economy could drop into recession are still swirling, despite better-than-expected GDP data released this morning.

The UK economy picked up pace in the second quarter of this year, with GDP rising by 0.2% – beating expectations that it would stagnate.

Growth was particularly pacey in June, with GDP rising by 0.5% thanks to stronger manufacturing and construction work. There were also more working days compared to May, when the UK downed tools for the coronation.

Rishi Sunak said the GDP report was good news, adding:

At the beginning of the year I made growing the economy one of my top priorities, and we are making progress.

“There’s still more work to do, but today’s figures show the plan is working.

However, both the CEBR and Capital Economics have warned today that the UK could fall into recession in the coming quarters, as high interest rates hit growth.

Craig Erlam, senior market analyst at OANDA, says better weather in June helped the the UK economy showed further resilience toward the end of the second quarter.

The cost-of-living crisis has clearly been an immense drag on the economy and due to its nature, will have hit some households much harder than others. But overall, consumer activity has been very resilient which has ultimately stopped the economy from falling into recession, an outcome that now looks increasingly unlikely.

The economy grew 0.5% in June from a month earlier, much stronger than anticipated and contributing to 0.2% quarterly growth. That’s nothing to write home about, of course, and the economy still faces enormous challenges and pressures, but inflation falling below average earnings growth could enable that spending resilience to continue.

City investors worried that the stronger growth could encourage the Bank of England to keep raising interest rates. This hit share prices in London, where the FTSE 100 index has closed down 94 points or 1.25% at 7524.

However, Resolution Foundation pointed out that the UK economy had recorded its weakest growth in 65 years outside a recession, in recent quarters….

… while still lagging other countries for post-Covid 19 recovery:

Here’s the full story:

And here’s the rest of the business news:

Updated

English wine producers predict bumper harvests after July rainfall

Some happy news to end the week: England’s wine producers are predicting bumper harvests after perfect weather this year.

Growers are expecting the highest and best yields to date, boosting the burgeoning wine industry in the UK. There are now 943 vineyards across Great Britain, according to a new report from the trade group WineGB. The industry produced 12.2m bottles in 2022, a large rise on the 5.3m bottles in 2017.

Additionally, exports are up from 4% to 7% and it is predicted production will reach 25m bottles by 2032, with 7,600 hectares (18,800 acres) of vines planted. At present there are 4,000 hectares (9,900 acres).

Augusta Raimes, a partner at Raimes English Sparkling, near Alresford, in Hampshire, said temperatures were just right, bringing back memories of 2018, which was a “phenomenal year” for growers. She said:

“We have very nice, clean fruit and big bunches. It’s very exciting.”

Co-op Bank lands deal to buy Sainsbury’s Bank mortgage book

The Co-operative Bank has clinched a deal to buy Sainsbury’s Bank’s £479m mortgage book for an undisclosed sum.

It marks Saisbury’s formal exit from the mortgage market, with the supermarket’s bank having closed to new home loan deals back in 2019.

Sainsbury’s Bank CEO Jim Brown said the deal marked a “big step in simplifying our business.”

The purchase is also a boon for the hedge fund-owned Co-op Bank, which had a separate £1bn bid for high street rival TSB rebuffed by its Spanish owners, Sabadell, in 2021. It is also the bank’s first portfolio acquisition in more than a decade.

The deal ends months of negotiations, with the hedge fund-owned Co-op Bank having reportedly been in the running for the portfolio sale as early as February.

The new owner said it was planning to transfer Sainsbury’s Bank’s 3,500 mortgage customers to its own business over a one year period “to ensure a smooth process”.

As well as boosting its customer base, the portfolio will likely be lucrative for Coop Bank, as rising interest rates allow banks to charge more for home loans - boosting their bottom line.

Nick Slape, CEO of The Co-op Bank said:

“This transaction, our first portfolio acquisition in more than a decade, further demonstrates the progress we have made in recent years and our strength in what remains a competitive UK mortgage market.”

Mohamed El-Erian, chief economic advisor to Allianz, says today’s UK GDP report is encouraging.

But, he warns, “they won’t put an end to recession fears due to the one-off aspects of some of the June rebound, other internal/external headwinds, and the legacy of structural economic weaknesses”.

Michael Hewson, chief market analyst at CMC Markets UK, confirms that today’s forecast-beating UK GDP report has given the markets a jolt, downwards:

After two days of solid gains, European markets have gone into full reverse today, falling sharply after US markets sold off into the close last night after San Francisco Fed President Mary Daly commented that the US central bank had more work to do when it comes to further rate hikes, which pulled US yields off their lows of the week.

Stocks got a further nudge lower after US PPI came in above expectations in July, rising more than expected, and pushing yields to their highs for the week.

Better than expected UK Q2 GDP numbers appear to have also prompted market weakness due to concern that the strength of today’s data might prompt the Bank of England to overplay their hand when it comes to tightening monetary policy further in the coming months.

By their own admission, the Bank of England has stated that monetary policy is already restrictive, yet markets continue to price in the prospect of another 50bps of rate hikes in the coming months, with all the inherent risks that might pose to the UK economy in the second half of this year.

This makes next week’s inflation and wages data even more important in the context of what actions the Bank of England takes next month when it comes to further rate hikes.

Back in the US, consumer confidence has dipped slightly.

The University of Michigan’s index of consumer morale has fallen to 71.2 in August, down from July’s 71.6.

Surveys of Consumers Director Joanne Hsu says:

Consumer sentiment was essentially unchanged from July, with small offsetting increases and decreases within the index.

At 71.2 index points, sentiment is now about 42% above the all-time historic low reached in June of 2022 and is approaching the historical average reading of 86. In general, consumers perceived few material differences in the economic environment from last month, but they saw substantial improvements relative to just three months ago.

Santander has joined the growing move to cut morgage rates.

From Monday (14th August), Santander is reducing a number of its residential purchase and remortgage fixed rates by up to 0.29%.

Justin Moy, founder at Chelmsford-based mortgage broker, EHF Mortgages, is among those welcoming the move, saying:

“It’s great to see more rate reductions from one of the High Street mortgage lenders. With the positive GDP figures today, along with inflation figures due shortly, it’s certainly a brave move by Santander.

The fact this move came after the GDP data published early on Friday may suggest Santander thinks we’re at, or at least near, the peak of interest rates.”

Updated

The higher-than-expected rise in US producer prices last month (see earlier post) has further rattled the City.

The FTSE 100 index of blue-chip shares in London has now sunk by 103 points, or 1.35%, to 7515 points, wiping out gains on Wednesday and Thursday.

Investors are concerned that the higher-than-forecast US PPI index, and the stronger-than-expected UK growth in Q2 and in June, creates more pressure to raise interest rates on both side of the Atlantic.

Ryan Brandham, head of global capital markets for North America at Validus Risk Management, says:

“US Producer Price Index, both headline and core, came in stronger on both a month-on-month and year-on-year basis. This hints that the battle against inflation may not be over just yet in the US. This result could lead to strength in the US dollar today, and higher US yields.”

CEBR: UK recession projected for later in the year

The CEBR thinktank predict the UK economy will decelerate this year, and fall into recession.

Not what Rishi Sunak will be hoping for ahead of the general election.

But Sam Miley, managing economist at the CEBR warns that higher interest rates will hit growth

“Though GDP picked up in Q2, it should be noted that growth remains poor by historic standards. The future outlook is also weak, with the economy continuing to face several headwinds, notably the impact of tighter monetary policy.

Cebr expects quarterly growth to decelerate in Q3. Contractions are then projected for the subsequent two quarters, marking a technical recession.”

This would also be a blow to efforts to catch up with other G7 nations:

Here’s a decent chart showing how G7 economies have fared since Covid-19:

Over in the US, producers have raised their prices faster than expected – in a blow to hopes of a ‘soft landing’ for America’s economy.

The Producer Price Index for final demand, which tracks what firms charge for their goods and services, rose by 0.8% in the year to July.

In July alone, prices rose by 0.3%, having fallen by 0.3% in May and been flat in June – which may raise concerns that US inflation has bottomed out.

Net trade had a negative impact on UK growth in the last quarter.

Export volumes fell by 2.5% in April-June, including a 0.8% fall in goods exports (mainly due to gold movements) and a 4.0% fall in services exports.

The fall in services exports was driven mainly by other business services, with decreases in advertising and market research, management consulting, and other trade in services.

Import volumes increased by 1.0% in the latest quarter, driven by a 1.7% increase in goods imports such as cars and aircraft.

A Pimms O'Clock sign outside a pub in Henley. The town of Henley on Thames in Oxfordshire in June.
A Pimms O'Clock sign outside a pub in Henley. The town of Henley on Thames in Oxfordshire in June. Photograph: Maureen McLean/Shutterstock

The ONS suspects that decent weather in June helped the UK’s service sector to grow during the month.

The second-largest positive contribution to growth was from accommodation and food service activities which increased by 1.6%.

The ONS says:

This was driven by food and beverage services which saw a particularly strong month in June, with anecdotal evidence from the monthly business survey suggesting that good weather and an increase in live events boosted turnover for businesses.

The largest positive contribution to growth was from the information and communication sub-sector which grew by 1.0%, with the biggest increases in motion picture, video and TV programme production, and computer programming, consultancy and related activities.

Julian Jessop, economics fellow at the right-wing Institute of Economic Affairs, points out that today’s GDP report is good news for the PM:

Interestingly, June was the first month since last October in which the UK’s services, production and construction sector all grew.

A reminder: Output growth in the services sector was 0.2% in June, while production expanded by 1.8%, and construction output grew 1.6%.

A chart showing how the production sector was the main contributor to the growth in GDP in June 2023

While strong manufacturing growth boosted production, the construction sector benefited from increases in both new work (2.0%) and repair and maintenance (1.1%) compared with May (when bank holidays hit output).

NIESR, the economic research group, have predicted the economy will keep growing in the current quarter – by 0.3%.

Having analysed today’s GDP report, they say:

  • Monthly GDP grew by 0.5 per cent in June following a contraction in growth by 0.1 per cent in May. This monthly figure was driven both by a weaker-than-normal May performance due to the extra bank holiday, as well as stronger-than-expected growth in production and construction.

  • GDP grew by 0.2 per cent in the second quarter of 2023 relative to the previous quarter, higher than we had forecast last month. However… the economy has largely flatlined following the initial stages of post-pandemic recovery; today’s monthly GDP is estimated to be only 0.8 per cent above its pre-pandemic (February 2020) level.

  • Our early forecast for the third quarter of 2023 expects GDP to grow by 0.3 per cent, remaining broadly consistent with the longer-term trend of low, but stable, economic growth in the United Kingdom. That said, as persistently high inflation continues to squeeze household budgets, alongside the effects of the high cost of borrowing, demand will be curbed in the near term. As a result, service-sector output in particular may falter and drag down on GDP in the coming months. The risks to GDP at the moment thus continue to be skewed downside.

BCC: UK economy is in a precarious place

The UK economy remains in “a precarious place” despite beating expectations in the last quarter, warned David Bharier, head of research at the British Chambers of Commerce, this morning.

Businesses are continuing to face a worrying mix of high inflation, rising interest rates, a tight labour market, and global economic uncertainty.

While the UK remains on course to avoid a technical recession, small movements in one direction or the another won’t mean much for many firms facing the toughest trading conditions in years, Bharier pointed out, adding:

“Our latest Quarterly Economic Survey shows that most SMEs continue to report no improvement to investment, cash flow, or sales. Worryingly, 41% of businesses are now concerned about the impact of rising interest rates.

“UK businesses are very adaptable, but they are looking for clear direction from the government and the Bank of England, particularly on interest rate policy and a long-term plan to unlock investment.

Business investment boom underway in UK

Analysts at Berenberg Bank are encouraged that UK business investment rose in the last quarter, by 3.4%, as this chart shows:

A chart of UK business investment

This has ben a long-running problem for the economy – but they believe a “business investment boom” is now underway:

Holger Schmieding, Berenberg’s chief economist, explains:

Productivity-enhancing business investment stalled badly after the UK voted to leave the EU, and then collapsed during the first wave of COVID-19 in early 2020. The weakness in investment has hurt productivity, harmed supply potential and contributed to inflation pressures.

However, the latest data indicate that the post-COVID snapback in investment may be turning into a genuine investment boom. Business investment has surged by 35% from the Q2 2020 low and is now 6% above its pre-Brexit-vote high.

Despite a rising cost of capital, cash balances worth c25% of GDP and corporate debt-to-GDP at a 25-year low provide businesses with ample space to raise investment spending, while rising labour costs and pricing power in final markets provide an incentive to do so. Fading political uncertainty, combined with economic recovery, can underpin further strong investment gains.

UBS ditches £8bn state backstop for Credit Suisse deal

In the banking world, UBS has terminated a 9bn Swiss franc (£8bn) government lifeline, and repaid billions of pounds worth of loans to the Swiss central bank, as part of efforts to rid itself of taxpayer support following its emergency rescue of rival Credit Suisse in March.

The lender said it had completed a “comprehensive assessment” and “severe” stress test of Credit Suisse assets, which showed it did not need the £8bn loss protection agreement (LPA).

The deal would have seen taxpayers absorb losses beyond the first 5bn Swiss francs, which UBS would have to take on.

UBS said:

“At the time, this was deemed necessary to protect UBS against potential tail risks as there had been very limited time to review respective assets over the rescue weekend. After reviewing all assets covered by the LPA since the closing in June and taking the appropriate fair value adjustments, UBS has concluded that the LPA is no longer required.”

UBS also announced today that it had turned down a 100bn Swiss franc (£89bn) liquidity lifeline from the Swiss National Bank, and that Credit Suisse has paid back 50bn Swiss francs worth of emergency funding to the central bank, bringing an end to the deal’s controversial state support.

Swiss authorities orchestrated UBS’ takeover of Credit Suisse in March, in order to stem a crisis of confidence in the global banking sector that led to the collapse of three US lenders. The merger drew criticism, including from Credit Suisse shareholders, who called for board members to be “put behind bars” following the bank’s failure.

UBS is expected to reveal more details about the progress of the merger on 31 August when it releases its Q2 results.

Reuters has seen an internal memo to UBS staff, saying:

“It should be clear to all of us that we still have a lot of work ahead of us to realize the full potential value from this transaction.”

Today’s GDP report could be “as good as it gets” for a while, warns Rob Morgan, chief investment analyst at wealth manager Charles Stanley:

“Having eked out 0.1% growth in the first quarter of this year, today’s second quarter UK GDP numbers showed an improvement on the previous two quarters. June was particularly buoyant, reflecting a rebound from a May peppered with bank holidays.

“Although the UK economy didn’t exactly smash forecasts of a flat period, it is sufficiently robust enough to give the Bank of England MPC plenty of food for thought at its next meeting to decide interest rates on 21st September. Their judgement will be a difficult one with inflation pressures lingering and the UK economy so far largely withstanding the strain of higher rates.

“Economic activity has held up pretty well with a softening in raw materials prices helping spur demand. However, GDP is a lagging indicator and this could be as good as it gets for a while as some key tailwinds fade. Consumer spending has been helped along by lower fuel prices alongside low unemployment levels and wage growth above 7%. With much of the drag from higher interest rates yet to be felt there is still a risk the economy could tip into recession in the second half of this year.”

FTSE 100 falls 1% after GDP report

The good news on UK growth this morning is going down a little badly in the City.

The blue-chip share index, the FTSE 100, has dropped by 1% or 76 points to 7542 points.

Investors appear concerned that the better-than-expected GDP figures could encourage the Bank of England to keep raising interest rates.

John Choong, equity and markets analyst at investing comparison platform, InvestingReviews.co.uk, explains:

“The FTSE 100 opened in the red this morning as markets were spooked by strong services data in the GDP figures. This may spur more rate hikes than markets expected, with the Bank of England handed more room to do so without triggering a recession given the economy’s strength.

As such, housebuilder stocks, which are sensitive to interest rate futures, are on the decline again with gilt yields taking a jump.

AJ Bell investment director Russ Mould says:

“Before we roll out the garlands it is worth observing the UK remains one of the few major economies to reach its pre-pandemic size. This is a story of resilience rather than dynamism.

The durability of the economy is a double-edged sword as it may lead the Bank of England to keep taking a hard line on interest rates. Given the lagged impact of rate increases, which have already seen borrowing costs increase from near zero to more than 5% in a little over 18 months, this could result in a more significant downturn at some point down the line.

“On the other hand, a lower than anticipated inflation number next week could build confidence in a Goldilocks scenario where the economy is blowing neither too hot or too cold and the Bank can start to dial back the pressure on rates and avoid inflicting much more pain without risking losing control of prices again.”

European stock markets are also in the red, with Germany’s DAX and Italy’s FTSE MIB both down 0.5%.

Data from China, showing the new loans plunged to their lowest since 2009, have added to concerns over the world’s second-largest economy.

Updated

Sunak: We are making progress

Rishi Sunak has claimed the government’s plan was working, after this morning’s GDP figures showed the UK economy grew by 0.2% in the second quarter of the year.

Sunak said:

This is good news. At the beginning of the year I made growing the economy one of my top priorities, and we are making progress.

“There’s still more work to do, but today’s figures show the plan is working.”

The PM will obviously be relieved that the downturn that was feared last winter has been avoided, although some economists do predict the economy could still drop into a recession (see earlier post).

Also, quarterly growth of 0.2% is still weak in historic terms. Over 1980 to 2014, for example, real GDP growth averaged 2.2% per year.

Updated

Resolution Foundation have published a thread on today’s UK GDP report:

Tomasz Wieladek, chief European economist at investment management firm T. Rowe Price, agrees that today’s GDP data bolsters the prospects of further increases in interest rates.

Wieladek says:

UK June GDP data surprised to the upside this morning growing by a punchy 0.5% relative to expectations of 0.2%. There was a large upside surprise in Manufacturing growth, growing by a very large 2.4% on the month, relative to expectations of 0.2% growth.

Construction output, a category that is normally interest rate sensitive, rose by 1.6% against expectations of no growth. Services grew by 0.2% in June, in line with expectations.

Nevertheless, it is striking that the most interest sensitive categories, manufacturing and construction, saw such a large rebound in June. This suggests that the rate hikes this year are not yet fully weighting on growth data as expected.

UK still facing 'mild recession', warns Capital Economics

Capital Economics, the City consultancy, are sticking with their forecast that the UK is heading for a mild recession later this year.

Ruth Gregory, their deputy chief UK economist, told clients that the 0.5% rise in GDP in June was mostly due to the return to the normal number of working days in June after May’s bank holiday for the King’s Coronation.

Thus, it makes the economy look stronger than it really is.

Gregory added:

Overall, the bank holiday, unusually warm weather and strikes make it hard to judge the true health of the economy. But our sense is that underlying activity is still growing, albeit at a snail’s pace. We still think that with most of the drag from higher interest rates still to come, GDP will fall in Q3 and a mild recession will begin.

That may not prevent the Bank from raising interest rates from 5.25% now to 5.50% in September. But it may mean that rates don’t rise as far as the 5.75-6.00% envisaged by the consensus and investors.

Today’s GDP report shows there was a 3.4% increase in business investment on the quarter, offset by a 6.7% fall in government investment.

Full story: UK economy grows faster than expected after surprisingly strong June

The UK economy grew faster than expected in the second quarter of this year after growth was boosted by a recovery in car manufacturing and a surprisingly strong June.

UK GDP increased by 0.2% in April to June, up from 0.1% in the previous three months and the best quarterly reading in more than a year, according to the Office for National Statistics (ONS).

The data surprised economists, with a poll of them beforehand forecasting no growth in output during the quarter. The reading was helped by an unexpectedly strong performance in June, when output rose by 0.5%. GDP had fallen by 0.1% in May because of an extra bank holiday to celebrate the coronation of King Charles after growth of 0.2% in April.

However, the UK economy still remains 0.2% smaller than it was in the final quarter of 2019, before the onset of the coronavirus pandemic triggered the deepest recession on record.

The cost of living crisis period of the last 18 months remains the weakest period outside a recession for 65 years, the Resolution Foundation thinktank pointed out, despite the UK economy dodging a technical recession of two consecutive quarters of declining GDP.

Darren Morgan, an ONS director of economic statistics, said:

“The economy bounced back from the effects of May’s extra bank holiday to record strong growth in June. Manufacturing saw a particularly strong month, with both cars and the often-erratic pharmaceutical industry seeing particularly buoyant growth.

“Services also had a strong month, with publishing and car sales and legal services all doing well, though this was partially offset by falls in health, which was hit by further strike action. Construction also grew strongly, as did pubs and restaurants, with both aided by the hot weather.”

You can read more here:

UK mortgage rates drop

Just in: We have some relief for mortgage holders this morning.

Average rates on two and five-year fixed rate mortages have dropped today, according to data provider Moneyfacts.

It says:

The average 2-year fixed residential mortgage rate today is 6.80%. This is down from an average rate of 6.83% on the previous working day.

The average 5-year fixed residential mortgage rate today is 6.28%. This is down from an average rate of 6.33% on the previous working day.

Several lenders have announced cuts to their mortgage rates this week, including Halifax, Nationwide, TSB, NatWest and Virgin Money.

Lower rates would help the economy, as it would cushion the impact of the ‘mortgage timebomb’ facing those households whose existing fixed-rate deals are expiring.

The UK’s faster-than-expected growth could also spur the Bank of England to keep raising interest rates, as it tries to bring down inflation.

David Baker, a partner at auditors Mazars, says:

“The better-than-expected GDP figures are likely to galvanise the Bank of England’s zeal to continue to raise interest rates.

“The Bank will remain very concerned about the persistence of inflation and will reflect on near full employment and high wage inflation as reasons to keep policy tight, despite higher mortgage rates denting consumer confidence and business surveys still pointing to lacklustre future growth.”

The BoE’s next scheduled interest rate decision is due on 21st September.

The financial markets currently indicate that another quarter-point increase in Bank rate in September, from 5.25% to 5.5%, is a roughly 68% chance, with a 32% chance that rates are left on hold.

The UK also lags behind most major international counterparts for growth over the last year:

RSM UK: UK can 'only just' avoid recession

The UK economy is still outperforming expectations, says Thomas Pugh, economist at audit, tax and consulting firm RSM UK.

The growth of 0.2% recorded in the last quarter is “a far cry” from the significant recession that seemed likely at the start of this year, Pugh points out, adding:

‘Strong economic growth in June was much more than just a bounce back from the extra bank holiday in May. Underlying growth rose rapidly suggesting that the economy is coping relatively well with the surge in interest rates and ongoing cost-of living-crisis.

‘While this is good news for the economy, a stronger economy points to inflation falling more slowly than it otherwise might have done. However, there are two reasons not to think interest rates need to go higher than the 5.5% - 5.75% peak already priced in. First, in its latest forecast the MPC had already forecast relatively punchy growth of 0.4% q/q in Q3, even factoring in the recent strength we doubt the economy will breach this. Second, the US economy’s recent experience proves that inflation can fall rapidly without a recession, or even a sharp reduction in growth. As such, we still think a peak of 5.5% or 5.75% looks right.

Pugh adds that growth is likely to fall back in 2024 as the impact from the rise in interest rates continues to grow, saying:

We think the economy will avoid a recession, but only just.’

Rachel Reeves MP, Labour’s Shadow Chancellor, says growth in the UK economy “is still on the floor”, adding:

“13 years of economic mismanagement under the Conservatives has left Britain worse off and trapped in a low growth, high tax cycle.

“Labour’s plan for the economy will boost growth, increase wages and bring down bills so working people are better off.”

Suren Thiru, economics director at ICAEW, says the rebound in quarterly UK GDP in the second quarter the year was “underwhelming”

Today’s growth report highlights “the worrying fragility in our economy” as inflation, higher interest rates and waning customer demand weigh on activity, Thiru says, adding:

“While GDP bounced back strongly in June, this reflects more the reversal of the squeeze on output from the extra bank holiday in May, rather than a meaningful improvement in our growth trajectory.

Looking ahead, the EY ITEM Club of economic forecasters predict the economy will show “a bit more momentum” in the third quarter of this year.

Martin Beck, chief economic advisor to the EY ITEM Club, explains:

A return to a normal complement of working days will mechanically boost growth, energy bills fell in July for the first time in almost three years and, relatedly, inflation is coming down, easing financial strains on households and businesses.

But Beck also points out that the growth of 0.2% reported this morning in Q2 is still “modest”.

He explains:

“The fact that GDP rose in June wasn’t much of a surprise, given the number of working days returned to normal following the extra public holiday in May. However, growth of 0.5% month-on-month was much better than the consensus expectation of 0.2% and more than reversed May’s 0.1% fall in output.

An apparent working-day boost was particularly noticeable in industry and construction, which both rebounded from falls in output in May to record growth of 1.8% and 1.6% respectively. Services output also increased, helped by particular strength in the information and communication and retail sectors, but the rise here was a more muted 0.2%, with the impact of strikes in the health sector holding back activity.

“Reassuringly, the economy also grew a bit faster than expected in Q2 as a whole, despite the obstacles presented by the extra public holiday, industrial action in some sectors, rising interest rates and still-high inflation. But growth of 0.2% quarter-on-quarter was modest and left the economy only 0.4% larger than a year earlier and still 0.2% below its pre-pandemic size in Q4 2019. So, the story of broad flatlining in activity since mid-2022 didn’t change a great deal.

The UK economy is “pedalling hard to achieve minimal economic growth”, warns economist Andrew Sentance, a former member of the Bank of England’s monetary policy committee which sets interest rates.

International comparisons

The UK lagged behind the US and France in the second quarter of this year, but beat Germany and Italy.

Not all G7 countries have reported Q2 GDP data yet, but we do know that:

  • US: grew by 0.6% in the second quarter of 2023

  • France: grew by 0.5%

  • Germany: stagnation, with 0% growth

  • Italy: contracted by 0.3%

The eurozone economy grew faster than the UK, with eurozone GDP expanding by 0.3% in April-June. But the wider European Union stagnated in the second quarter.

Treasury minister John Glen argues that today’s growth figures show there was “a lot of resilience” in the UK economy.

Speaking on Radio 4’s Today programme, Glen defends the UK’s 0.2% growth in April-June.

If you look at what’s happening in Germany where it’s flat, and Italy where it’s minus 0.3, it’s not easy across the whole of the world economy at the moment.

The combined effects of what happened with Russia and Ukraine, supply chains, the legacy of Covid, that can’t be fixed in one lever from the Treasury.

The TUC union have accused Jeremy Hunt of being “asleep at the wheel” over the state of the UK economy.

Despite the pick-up in growth in Q2, and June, TUC general secretary Paul Nowak warns that jobs are at risk, and pay and conditions are being held down.

Nowak says:

“The chancellor must stop hiding behind the Bank of England and take responsibility for the serious economic failure unfolding on his watch.

“Around the world, other countries are delivering far higher investment and stronger protections for workers – while asking those with the broadest shoulders to pay a fairer share. There is no reason why the UK can’t follow suit.

“After 13 years of Conservative government, the high pay high productivity economy we all desperately need remains out of reach.

“Instead of sitting back and hoping for the best, the government needs to take responsibility and act.”

GDP growth of 0.2% in April-June means little to the 7.3 million low-income families who right now are going without essentials like heating, eating and adequate clothing, warns the Joseph Rowntre Foundation’s chief economist, Alfie Stirling.

Stirling explains:

Even those who aren’t facing immediate hardship are being squeezed from all sides. As interest rates continue to rise, the already eye watering cost of rent, food and energy is being compounded by the rising cost of credit cards, overdrafts, and mortgages.

“For too many people, and too many places, the economy simply isn’t working. There are too few good jobs with rising real pay, too few people have the resources to take risks and try something new, and there is too little investment in the things we all need, both now and for the future.”

Resolution: weakest growth in 65 years outside of a recession.

Although UK GDP was stronger than expected in the April-June quarter, over the past 18 months growth has been the weakest for 65 years outside of a recession, says the Resolution Foundation.

So while the economy is not in recession, “the reality” is that it continues to stall, they say.

High inflation and rapid increases in interest rates meaning that this period will feel like a recession in all but name to many, Resolution warns.

James Smith, research director at the Resolution Foundation, says:

“The good news is that the economy grew by 0.2% in Q2, stronger than the flat growth many had expected. This is a continuation of the UK’s relative resilience as we continue to dodge the technical recession experienced elsewhere in the face of the ongoing cost of living crisis.

“But the big picture is that the UK economy has expanded by just 0.4% since the start of 2022 – the weakest growth in 65 years outside of a full-blown recession.

“With the economy continuing to stall, we are far from out of the cost of living crisis woods yet. Such weak growth will feel like a recession to many as families struggle with the ever-rising cost of essentials and higher mortgage repayments.”

[updated at 8.30am]

Updated

Treasury minister John Glen has argued it is “very difficult” to achieve higher levels of growth when “you are dealing with inflation pressures”.

Speaking to Sky News this morning, Glen said:

“I think what it shows is there’s a lot of resilience in the UK economy. We saw a record upgrade from the IMF (International Monetary Fund) of 0.7% higher for the UK economy this year. That’s welcome news. When I started in office nine-and-a-half months ago, recession was predicted.

But of course, you know, I would like that figure to be higher, but we are in the middle of the pack with respect to our peers in the G7.

Germany’s is actually flat, Italy’s minus 0.3%. So, we’ve got a lot of work to do, but also in the context of the inflation pressures we see in the economy at the moment, it’s obviously a delicate balancing act because we want to deal with that inflation, which is a massive impact for business confidence and for households as we know, and obviously it’s very difficult to achieve higher levels of growth when you’re dealing with inflation pressures.”

Asked about the Prime Minister’s pledge to grow the economy by the end of the year, the Chief Secretary to the Treasury said:

“We had the highest growth last year in the G7 and we are predicted in 2025 to get back up to that level.

“But you won’t expect me to commentate on the outcome of something that will take all year: we are at half-time.”

Glen was also quizzed about the revelation last night that Conservative MP Theresa Villiers held £70,000 in Shell shares while environment secretary.

Glen pointed out that Villiers has apologised, adding:

“It was an oversight on her part and she will correct it and make sure it doesn’t happen again.”

Updated

On a quarterly basis, the UK economy has yet to recover its level at the end of 2019, before the Covid-19 pandemic.

The level of quarterly GDP in Quarter 2 2023 is now 0.2% below its Covid-19 level set in Q4 2019, the ONS says.

That means the UK is “the only large advanced economy yet to regain its pre-COVID late-2019 level,” points out Reuters.

Rising household expenditure keeps economy away from recession

The Great British consumer is proving remarkably resilient and is helping the economy avoid falling into recession, for now at least.

That’s the verdict from Ed Monk, associate director for Personal Investing at Fidelity International:

Growth in the second quarter of 0.2% was slightly above expectations, thanks to household expenditure that jumped between April and June - no mean feat on the face of the cost-of-living crisis we’ve seen.

“The tight labour market helped to support consumer spending with wages rising strongly, albeit below the rate of inflation. Government support though the Energy Price Guarantee and an inflation-matching rise in the State Pension has also softened the blow for households, and it may also be possible that excess saving during the pandemic has allowed spending to be maintained.

“The UK economic glass is either half-full or half empty, depending on your point of view, Monk adds:

For the optimists, the Britain has avoided recession while wage growth and the labour market have been resilient. For the pessimists, growth is still weak with UK GDP below its level from before the pandemic and lagging other major economies.

“Conditions are likely to get worse from here as higher interest rates take full effect, wages slow and the jobs market weakens. These things may be necessary in the fight against persistent inflation but it means there’s more uncertainty to come for households.”

UK's Hunt: Plan to fight inflation taking effect

Chancellor of the Exchequer Jeremy Hunt has welcomed the news that the UK economy grew by 0.2% in April-June, saying:

“The actions we’re taking to fight inflation are starting to take effect, which means we’re laying the strong foundations needed to grow the economy.

“The Bank of England are now forecasting that we will avoid recession, and if we stick to our plan to help people into work and boost business investment, the IMF (International Monetary Fund) have said over the longer-term we will grow faster than Germany, France and Italy.”

Sterling strengthens after GDP report beats forecasts

The pound has strengthened, jumping almost half a cent to $1.272 against the US dollar.

June’s stronger-than-expected growth feels like “the first positive surprise in a long run of economic plot twists”, says Joseph Calnan, corporate FX dealing manager at Moneycorp:

Calnan explains:

However, both GDP and inflation are still off where they need to be, with the Bank of England and government policymakers clearly struggling to deliver on their respective remits.

“The thornier question is what this will mean for interest rates. What the BoE has been looking for in its relentless campaign of back-to-back interest rate hikes is a meaningful slowdown in the economy, and this doesn’t hit that brief.

“Despite the backdrop of spiralling wage growth and a hot labour market; it’s possible the 25 bps rate rise forecast at the next MPC meeting will remain. But, as the past few months have shown us, you can never be sure which way the next set of economic indicators will go.”

This morning’s UK GDP report is stronger than expected:

ONS: Economy bounced back from May's extra bank holiday

ONS director of economic statistics Darren Morgan says there was “particularly buoyant growth” in the UK’s car-making sector in June, and also in the pharma sector:

“The economy bounced back from the effects of May’s extra bank holiday to record strong growth in June. Manufacturing saw a particularly strong month with both cars and the often-erratic pharmaceutical industry seeing particularly buoyant growth.

“Services also had a strong month with publishing and car sales and legal services all doing well, though this was partially offset by falls in health, which was hit by further strike action.

“Construction also grew strongly, as did pubs and restaurants, with both aided by the hot weather.”

Monthly UK GDP is now estimated to be 0.8% above its pre-Covid-19 levels, following the 0.5% growth reported in June this morning.

UK GDP to June
UK GDP to June Photograph: ONS

A range of businesses cited the additional bank holiday in May as a reason for increased output in June compared with May, the ONS says.

A breakdown of today’s GDP report shows that production (which includes manufacturing) grew by 1.8%, and was the main contributor to growth in monthly GDP in June.

The UK’s dominant service sector grew by 0.2% in June, while construction expanded by 1.6%.

The UK economy grew at its fastest pace in over a year in the last quarter, according to today’s GDP report.

It has now grown for the last three quarters in a row, as this chart shows:

UK GDP
UK GDP Photograph: ONS

Growth has been modest – with the economy expanding by just 0.1% in October-December and January-March, before picking up in April-June. That’s weak by historic standards.

But happily, the recession feared last year has not materialised, yet anyway.

Updated

UK avoids stagnation with 0.2% growth in Q2

Newsflash: The UK economy has posted modest growth in the second quarter of this year, defy fears of stagnation.

UK GDP expanded by 0.2% in April-June, the Office for National Statistics reports, beating forecasts of no growth in the quarter. This follows growth of 0.1% in January-March.

In June, the economy also fared better than expected -- with growth of 0.5%.

That follows the GDP fall of 0.1% in May, and growth of 0.2% in April.

The ONS explains:

In output terms, the services sector grew by 0.1% on the quarter, driven by increases in information and communication, accommodation and food service activities, and human health and social work activities; elsewhere, the production sector grew by 0.7%, with 1.6% growth in manufacturing.

In expenditure terms, there was strong growth in household consumption and government consumption, which was partially offset by a fall in international trade flows in the second quarter.

Updated

Just five minutes to go until we get the UK economy’s report card for the second quarter of the year…

A trio of bank holidays in May hurt activity in the manufacturing and construction sectors as workers enjoyed the extra days off, points out Victoria Scholar, head of investment at interactive investor.

But that should also provide a “back-to-work boost for the economy” in June, she explains, adding:

According to June’s retail sales figures, the record-breaking heatwave supported sales in supermarkets and department stores, partly driven by high inflation which flattered food sales, lifted by higher prices rather than stronger volumes. Lower fuel prices versus last year during the energy crisis are also likely to provide a tailwind to fuel sales and in turn June’s growth figure.

However, the boiling hot temperatures are likely to have dampened productivity, particularly in agriculture and construction. They also caused problems in the transport sector with passengers on trains and planes facing delays and cancellations.

The UK economy probably stalled in the second quarter due to carry-over weakness from strikes and a drag from May’s extra bank holiday, Bloomberg Economics predict.

Bloomberg adds:

GDP is seen registering zero growth quarter on quarter and expanding 0.2% year on year.

For this quarter, BE forecasts a gain of 0.1% but that’s probably the last positive news for a while: High interest rates are expected to tip the economy into recession later in 2023.

Updated

Introduction: UK GDP in focus

Good morning.

We’re about to discover how the UK economy fared over the spring and early summer, in the face of rising interest rates and the cost of living crisis.

The Office for National Statistics will release its first estimate of UK GDP for the second quarter of 2023, and just for June, at 7am.

Economists fear the economy stagnated in Q2, with no growth, after the meagre 0.1% expansion recorded in January-March.

In June alone, City analysts are expecting to see growth of 0.2%, a modest recovery after the 0.1% contraction in May.

Activity in May was disrupted by the extra bank holiday for King Charles’s coronation, so June could see a recovery in activity in comparison.

Adam Cole of RBC Capital Markets explains:

Though there was an extra bank holiday in May for the Coronation, the impact of that appears to have been less than the impact of similar additional public holidays in 2022. Also, a recovery in activity from strikes the previous month helped compensate.

That is likely to reverse again in June which will drag on activity and act as a counterweight to a moderate recovery in activity in June from the impact of May’s extra bank holiday.

Michael Hewson of CMC Markets reckons the forecasts for stagnation in Q2 are too pessimistic.

Having eked out 0.1% growth in Q1 of this year, today’s UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth.

That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.

Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy.

The data is released at 7am UK time…

The agenda

  • 7am BST: UK GDP report for Q2 2023, and for June

  • 7am BST: UK trade report for June

  • 9am BST: IEA monthly oil report

  • 1.30pm BST: US PPI index of producer prices

  • 3pm BST: University of Michigan Index of Consumer Expectation

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