UK economic growth slows in the second quarter

Union flag down

The UK's economic growth slowed in the second quarter of the year, with gross domestic product (GDP) rising just 0.2% according to latest figures from the Office for National Statistics (ONS).

This compared with GDP growth of 0.5% in first three months of the year, following a 0.5% contraction in the last three months of 2010.

The ONS said that growth had been slowed by some one-off factors such as the extra Bank Holiday for the royal wedding, early warm weather and the effects of the Japanese earthquake and tsunami.

Without the impact of these events, growth was forecast to be 0.7%.

Chancellor George Osborne is expected to be among those who highlight this to combat suggestions that the economy is barely improving, while some commentators had predicted a contraction.

"The positive news is that the British economy is continuing to grow and is creating jobs," said Osborne. He faces calls from Shadow Chancellor Ed Balls to reverse the increase in VAT that took effect at the beginning of the year.

In response, sterling spiked half a cent against the euro and dollar just after the figure was released. The pound had been down against both currencies prior to the announcement.

Meanwhile, investors were shaken by the figures, sending the FTSE 100 south in the aftermath of the release.

Estimates due for revision?

Vicky Redwood, senior UK economist at Capital Economics points out that the figures are only estimates and there is other evidence that underlying growth has been rather weaker.

"Even if the underlying pace of expansion did pick up in the second quarter, the forward-looking indicators for the third quarter are not looking too promising, while the government's spending cuts are still gathering momentum.

"We still expect GDP growth of just 1% this year," she said.

Howard Archer, chief UK and European economist at IHS Global Insight, said the GDP report was weak, but not as bad as it could have been.

Looking ahead, he commented: "There may well be a limited pick-up in activity in the third quarter as some of the activity lost to the second quarter's distorting factors are made up. Nevertheless, the economy looks set to continue to struggle as consumers' purchasing power is squeezed, government spending cuts increasingly kick in and recently softer global growth dampens exports."

Archer forecasts that the economy will grow by just 1.1% this year.

"We see growth picking up to a still-far-from-dynamic 2% in 2012 as moderating inflation eases the squeeze on consumers, global growth improves and the Olympics provides a modest boost to the economy."

But Ian Kernohan, economist at Royal London Asset Management, emphasises that preliminary estimates of GDP are often revised, sometimes quite heavily.

"Although there will be a lot of chat about what this number does or doesn't mean, a more accurate picture of the economy during the second quarter of 2011 will not be available for some time, perhaps years."

He said the big picture remains unchanged: "The UK economy is going through a major rebalancing, from private and public consumption to net exports and business investment, which will take several years to complete."

This article was taken from our sister website, Interactive Investor.

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