The UK economy grew by 0.4% in the second quarter, matching what economists had forecast and slowing from the 0.6% recorded in the first three months of the year, according to figures published this morning by the Office for National Statistics. Output is 1.2% higher than a year ago. The reading sits a shade above the 0.3% the Bank of England pencilled into its July forecasts, and it matches the euro area exactly, where growth also came in at 0.4%.
Services did the work, expanding 0.5%. Information and communication led the way, up 2.7% on the back of a 3.7% rise in computer programming and consultancy, while professional and scientific activities added 1.7% with advertising and market research up 4.3%. Construction managed 0.3%. Production was flat, as a 1.0% rise in manufacturing was cancelled out by falls of 2.3% in electricity and gas and 3.7% in water and waste. Business investment was the most encouraging line, up 1.7% on the quarter and driven by spending on computer hardware. The monthly path tells the more useful story: output fell 0.1% in April, flatlined in May and then rose 0.3% in June, so the quarter ended with rather more momentum than it began.
For the Bank of England, which sets UK interest rates, an economy growing slightly faster than its own forecast removes one argument for sitting still. Bank Rate stands at 3.75% and was held there again at the July meeting, on a vote in which three of the nine committee members wanted a quarter point rise. Policymakers judged the risks to inflation to be tilted upwards, with energy costs climbing again as tension around the Strait of Hormuz keeps oil elevated. Growth is not part of the Bank's mandate, but holding rates above neutral is hard to justify without it. The next decision comes on 17 September.
What it means for GBP/EUR
The pound barely moved. GBP/EUR traded around 1.1710 through the morning, a few hundredths of a cent from where it opened, because a number that lands exactly on forecast gives traders nothing to reprice. Sterling has spent August in a narrow band between roughly 1.1650 and 1.1720, still well short of the 1.1828 it touched on 15 July, its highest in thirteen months. What happens next rests less on this release than on whether September brings a rate rise, and on how the new government's spending plans are received by the bond market. For a business with euro costs to meet later in the year, a forward contract fixes today's rate for a payment due on a future date, which is worth more when a pair is going sideways and the risks sit on both sides of it.
