UK Economic Growth Set To Bounce Back After Weak Start

UK Economic Growth Set To Bounce Back After Weak Start
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Growth figures published today are set to show the economy bouncing back after a weak start to the year.

Gross domestic product (GDP) is expected to have increased by 0.7% in the second quarter after falling back to a rate of 0.4% in the previous period – the weakest pace since the end of 2013.

The acceleration in growth is expected to fuel renewed speculation about interest rates after Bank of England governor Mark Carney said two weeks ago that the UK was "moving closer" to a hike.

GDP expectations for the year were recently marked down by the independent Office for Budget Responsibility from 2.5% to 2.4% – following growth of 3% in 2014 – after the unexpectedly slow start to the year.

The latest figures from the Office for National Statistics (ONS) will show whether the economy is now back on track.

Investec economist Chris Hare said the dominant services sector – representing three-quarters of output – was likely to do "most of the legwork" with the beleaguered construction and manufacturing industries set to have shrunk.

Scotiabank's Alan Clarke said 0.7% was "probably the right call" but that monthly data published so far meant that any risks to this were skewed towards a slightly weaker rather than stronger outcome.

Growth in domestic demand – with household finances boosted by inflation at zero and accelerating wage growth – should buoy demand for services.

But manufacturing has been under pressure because of the strength of the pound, making exports more expensive for foreign customers.

Latest figures from the CBI added to the gloom in the sector, showing the level of total order books at its lowest level in two years.

Meanwhile there was a setback for the consumer side of the economy when official figures showed retail sales unexpectedly fell by 0.2% in June.

ONS data also showed that the UK's jobs boom may be easing off, with unemployment rising by 15,000 in the three months to May – the first increase in more than two years.

But new figures from researchers Nielsen showed consumer confidence had risen to its highest level for nine years.

Strong GDP figures could increase speculation about an interest rate hike being sooner than expected, following Mr Carney's remarks. It had previously not been pencilled in until well into next year.

Faster growth could be seen as likely to translate into greater inflationary pressure down the track, adding to the chances of an increase as the Bank seeks to keep inflation from surpassing its 2% target.

James Knightley said the likely second quarter growth figure was "above trend and likely to keep the relatively hawkish rhetoric coming out of the Bank of England".