Despite being the only developed economy not yet to have recovered to its pre-global pandemic level, the UK economy unexpectedly grew in the second quarter, laying the groundwork for the Bank of England to hike interest rates further. Data released on Friday showed that the UK's economy grew by 0.2% in the second quarter, not only better than the flat growth economists had generally anticipated but also above the Bank of England's estimate of 0.1%.
Given that the Bank of England had previously emphasized economic resilience as one of the factors supporting its judgment, the strong performance in the second quarter has boosted financial market expectations for the Bank of England to continue raising rates. Neil Birrell, a fund manager at Premier Miton, stated that the Bank of England might have been contemplating a pause in rate hikes, but the unexpected economic growth in the second quarter presented a dilemma.
Since May, manufacturing has seen its best performance since early 2019, with business investment growing by 3.4% compared to the previous quarter. UK Chancellor Jeremy Hunt said the measures taken by the UK to fight inflation are beginning to take effect, and the GDP data for the second quarter shows that the anti-inflation policies are laying a solid foundation for economic growth.
However, while the UK's unexpectedly positive economic growth in the second quarter has temporarily alleviated the risk of the country falling into a recession, data from the beginning of the year to date show that the overall performance of the UK economy has been relatively poor. As of the second quarter, the UK economy was 0.2% below its level at the end of 2019, whereas the economies of Germany, France, Italy, and the United States were higher by 0.2%, 1.7%, 2.2%, and 6.2%, respectively.
Moreover, most economists believe that despite the UK economy's surprising rebound, high inflation may cause the central bank to maintain its tight policies for a longer period, and with the dim outlook for the global economy, the UK economy still faces many difficulties and risks.
Economist Ruth Gregory from the consultancy Capital Economics stated that due to the long lag in the impact of central bank tightening on the economy, we maintain our belief that the UK economy will enter a mild recession later this year.
