UK GDP: Growth better than expected in second quarter

Analysts underestimated the UK economy in the second quarter of the year. UK GDP grew by 0.3% between April and June, beating expectations of 0.1% from both the Bank of England and a Reuters poll.

Today’s figure, published by the Office for National Statistics (ONS), marks a slowdown compared to the first quarter, when the economy expanded by 0.7%. However, many had feared worse after the economy shrank for two consecutive months in April and May.

Higher payroll taxes, Trump’s trade tariffs and restrictive monetary policy have all taken their toll in recent months.

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The services and construction sectors both contributed positively to GDP growth in the second quarter, with services growing by 0.4% and construction by 1.2%. The production sector fell by 0.3%.

On a monthly basis, GDP grew by 0.4% in June following drops of 0.1% in both April and May.

“Today’s economic figures are positive with a strong start to the year and continued growth in the second quarter. But there is more to do to deliver an economy that works for working people,” said chancellor Rachel Reeves.

A growth rate of 0.7% in the first quarter set a high bar for comparison, but this was partly driven by activity being brought forward to February and March ahead of stamp duty changes in April. Some businesses were also trying to beat tariff threats ahead of ‘Liberation Day’.

Good news and bad news

Economists at Deutsche Bank point out that today’s GDP reading looks even better when you consider the unrounded figure of 0.345% – “a hair’s breadth away from [being rounded to] an even stronger surface print”.

The bank says this puts the UK “on course to become the second-fastest growing economy in the G7”, having claimed the top spot in the first quarter.

This doesn’t mean there aren’t areas of concern.

“The biggest contributor to GDP growth came via government spending. Public consumption and investment shot up 2% over the quarter and was the largest contributor to GDP, adding 0.5 percentage points,” said Sanjay Raja, Deutsche Bank’s chief UK economist.

Meanwhile, household spending – which Raja calls the “growth engine of the UK economy” – grew by just 0.1%. Business investment dropped by 4%.

Speculation in the lead up to the Autumn Budget could harm consumer and business sentiment further, with taxes expected to rise. The National Institute of Economic and Social Research (NIESR) recently warned the government is on track to miss its fiscal target by £41 billion.

Some think Reeves will extend the freeze on income tax thresholds to help plug the gap, meaning many will find themselves in a higher tax bracket over the coming years as a result of fiscal drag.

It comes at a time when consumers are already feeling the pinch.

“A softening labour market, stubbornly high inflation, slowing wage increases and a higher tax burden present a troublesome combination for household budgets,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“While five interest rate cuts since August last year have offered some relief, the latest 25 basis-point reduction to 4% may not be reflected in lower borrowing costs across the board as some lenders remain cautious about future rate cut expectations amid niggling inflationary pressures.”

“We expect growth to slow in second half”

The economists at financial institution ING note similar concerns to those at Deutsche Bank when digging into the numbers beneath the headline reading of 0.3% – i.e. much of the growth was driven by government consumption rather than households and businesses.

Furthermore, they think GDP growth is likely to slow going forward.

“We would note a tendency for the growth figures to come in strong through the first half of the year, only to be weaker in the second half,” said James Smith, UK economist at ING.

“This is a trend we’ve seen over the past three years, which potentially points to challenges in the way the data is being seasonally adjusted and adjusted for inflation.”

Smith also points out that the jobs market is under pressure, investment intentions are weaker and tariff uncertainty continues to bite. None of this is conducive to strong growth.

A stronger-than-expected GDP reading could give the Bank of England confidence in its “gradual and careful” approach to interest rate cuts – particularly as some committee members appear keen to slow things down.

However, the challenges hidden beneath the headline figure won’t be lost on rate setters. They decided to look through the strong headline figure of 0.7% in the first quarter, having judged that it was driven by “temporary factors that provide little signal for underlying momentum in GDP”.

Some economists are predicting one more interest rate cut before the end of the year, but this is far from certain following a knife-edge decision at the last meeting on 7 August. Inflation is expected to hit 4% by September, which is keeping policymakers cautious.