The UK economy grew faster than expected in June, with a growth rate of 0.5%. This helped bring the second-quarter growth to 0.2%. However, analysts have differing opinions on what these figures mean for the future.
One positive factor in June’s growth was the strong performance of the production sector, including manufacturing. The warmer weather also attracted more people to pubs and restaurants, boosting the economy.
Some analysts believe that households will continue to fuel expansion despite soaring inflation. Household consumption grew by 0.7% in the second quarter, and it is expected that wage growth will surpass inflation in the upcoming weeks. This could lead to further rise in real incomes, supporting economic growth.
On the other hand, some economists are less optimistic about the future. They argue that the June expansion can be partly attributed to the return of normal working days after the king’s coronation. They also warn that the full impact of rising interest rates has yet to be felt and could negatively affect sectors sensitive to rate increases, such as real estate.
Furthermore, trends in business investment are seen as a potential indicator of difficulties ahead. While there was a 3.4% increase in business investment in the quarter, this was largely due to imports of US aircraft. Investment in ICT and machinery declined after the end of the government’s super-deduction allowance.
The Bank of England remains divided on the significance of these growth figures. With inflation still well above the target, the central bank is preparing for another interest rate hike in September. However, with further rate hikes anticipated and the full impact of previous hikes yet to materialize, economic growth is expected to remain subdued.
A recent report from the National Institute for Economic and Social (NIESR) research indicates that it will take until the end of 2024 for UK output to surpass its pre-pandemic level. This suggests that the UK economy may face five years of lost economic growth.
Overall, the impact of the Bank of England’s rate hikes on the UK economy remains uncertain. While some indicators point to continued growth, there are concerns about the potential for a recession due to various factors, including rising interest rates and sluggish business investment.
