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Heatwave boosts UK GDP to 0.4% in Q2

by International Commercial Investment on September 3, 2018

Source: Investment Week

UK GDP grew by 0.4% in the second quarter of 2018, up from 0.2% in the previous quarter, according to the latest figures from the Office for National Statistics (ONS).

In the figures for the three months to the end of June, growth was driven by services and offset by a fall in production.

The figure was in line with economists’ expectations and those made by the Bank of England.

Services saw growth of 0.5% to make it the largest contributor during the quarter but there was a 0.8% contraction in production, which had a negative impact. Business investment grew by 0.5%.

Looking over the first half of the year, growth was 0.6%, unchanged from the second half of 2017.

The ONS said weather had been a factor in economic performance; poor weather contributed to low growth in the first quarter while better weather this summer provided a boost to areas such as retail and construction in the second quarter.

However, the heatwave led to a 2.7% decline in production for energy suppliers.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the Q2 figures were boosted by several summer events: “The UK economy has gathered momentum in the second half as the World Cup, the Royal Wedding and warm weather got consumers spending their pennies on beers and barbecues.

“Not everyone makes hay when the sun is shining though, with energy suppliers seeing a 2.7% decline in production as the warm weather meant reduced demand for household heating.

“In today’s economic climate 0.4% quarterly growth draws a small cheer from the crowd, though it would have been deemed below par prior to the financial crisis. In the ten years running up to the crisis, UK economic growth averaged 0.73% per quarter.

“Indeed a rather less than encouraging assessment of the UK’s economic prospects can be found in the performance of the pound, which has slipped back below $1.30 against the dollar in the last week, despite a rise in UK interest rates. Fears over the potentially negative impact of Brexit clearly play a part in this, however we shouldn’t ignore the fact this particular coin is two sided, and dollar strength is a contributing factor alongside sterling weakness.”

Nancy Curtin, chief investment officer at Close Brothers Asset Management, added a rebound in economic growth in the second quarter should be taken with a pinch of salt.

“Even with some acceleration, the economy is far from its peak. The rate of growth looks subdued in comparison to some global peers, with the US economy growing at twice the speed.

“However, it is not all doom and gloom. The consumer is beginning to look a little stronger, supported by wages growing in real terms, and the weak pound has buoyed exporters. Investors will be hoping this trend continues despite the uncertain backdrop.”

Ruth Gregory, senior UK economist at Capital Economics, continued: “Looking ahead, the surveys suggest that the economy has maintained this pace of growth at the start of Q3. Of course, Brexit-related uncertainties could intensify over the coming months, if the EU negotiations stall or if Brexit turmoil results in a general election.

“In the absence those developments, however, we remain cautiously optimistic about the economy’s ability to expand at reasonably solid rates over the remainder of the year. We expect growth of about 1.5% over 2018 as a whole – a little above the consensus expectation of 1.3%.”

Anthony Gillham, head of investment at Quilter Investors, said: “While growth has improved slightly, it does so from a low starting point. Over the medium term, UK growth has been thoroughly unspectacular, with the domestic economy expanding at a slower pace than most developed countries.

“There is a real risk of stagflation on the horizon, with the recent interest rate hike failing to address the fall in the pound, and the sentiment of Mark Carney and Liam Fox even talking the value of Sterling to its lowest point against the dollar in a year.

“The UK finds itself in a difficult situation where the Bank of England is hiking rates to try and keep a lid on import costs that drive up inflation, but it is doing so against the backdrop of weak economic growth.”

International Commercial InvestmentHeatwave boosts UK GDP to 0.4% in Q2