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Economy's weak 2017 performance so far lowers chance of interest rates increase

27 July, 2017, 00:50 | Author: Paula Vaughn
  • The UK economy maintained its sluggish start to the year despite growth accelerating in the second quarter thanks to a rebound from the services sector. The latest quarter saw growth of 0.3%  better than the first quarter of 201

In its preliminary estimate of economic activity, the Office for National Statistics (ONS) said on Wednesday (26 July) the service sector supported economic activity in the months from April to June, along with film production and distribution, but construction and manufacturing activity weakened.

Details of the report showed growth in United Kingdom continues to be led by the dominant services sector which expanded by 0.5 percent q/q in Q2, while contractions were recorded in both the industrial and construction sectors.

It also comes days after the the International Monetary Fund (IMF) downgraded its forecast for United Kingdom growth in 2017 from 2% to 1.7% after a weaker-than-expected reading in Q1.

Economic output grew by 0.3 percent on the quarter, edging up from a sluggish rate of 0.2 percent in the first quarter, as a booming film industry and bright spots elsewhere in the services sector were largely offset by contractions in manufacturing and construction.

Construction and manufacturing were the largest downward pulls, following two consecutive quarters of growth, the ONS said.

GDP growth had expanded by 0.2 per cent in the first three months of the year, so the economy's performance picked up.

Taken together, the data for the first and second quarters indicate a first half performance that was lacklustre and suggest that the Bank of England will likely keep interest rates unchanged for the time being.

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The latest ONS data showed that services continued to dominate GDP growth, recording a 0.5 per cent rise in output for the period.

David Page, senior economist at AXA Investment Managers, said: "Today's release undershot the Bank of England's expectation of GDP growth which was for 0.4 per cent in the second quarter".

So far sterling seems little affected, trading at $1.3013 while the FTSE 100 is up 42 points so far at 7,477. We forecast some improvement in the second half of the year as inflation starts to abate, but we doubt growth will return to above trend levels for at least a year. Meanwhile inflation began to recede, which if it continues in the coming months could end the squeeze on real incomes. Yearly growth was forecast at 1.7%.

It has revised its United Kingdom forecast to 1.7 per cent from 2 per cent, while it has downgraded its U.S. forecast to 2.1 per cent from 2.3 per cent based.

"With the uncertainty around Brexit negotiations and the weak data on growth the outlook for the United Kingdom economy is far from rosy".

GDP per head increased by 0.1 percent during quarter 2 and has seen an increase of one percent compared to Q2 2016.

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