UK economic growth figures to ignite interest rate debate


The latest snapshot of economic growth this week will heat up the debate about when the Bank of England will raise UK interest rates for the first time since the depths of financial crisis.

Economists predict official figures on Tuesday will show GDP growth bounced back in the second quarter after a new-year slowdown. Alongside fading worries about the Greek debt crisis and signs of rising living standards, any such recovery in headline growth could fan expectations that the Bank’s policymakers are readying to raise interest rates, perhaps even before the end of the year.

The Guardian reports that the data is expected to show the economy expanded by 0.7 per cent between April and June, according to the consensus forecast in a Reuters poll. That would be close to the pace of growth at the end of last year and markedly higher than first-quarter growth of 0.4 per cent.

The GDP estimate from the Office for National Statistics will garner even more attention than usual given recent comments by the Bank governor, Mark Carney, that a hike in borrowing costs may be “moving closer” after more than six years of record low interest rates at 0.5 per cent.

James Knightley, senior economist at ING, is expecting a strong rebound from the sluggish opening months of 2015. “We forecast 0.7 per cent, which is above trend and is likely to keep the relatively hawkish rhetoric coming out of the Bank of England,” he said.

Recent business surveys have suggested household spending remains the main engine of growth despite the government’s long-standing vow to rebalance the economy towards more manufacturing and exports.

A rise in sterling against other big currencies has made UK goods more expensive overseas and has led a drop in exports, according to manufacturers. Chris Hare, economist at Investec, expects that to be reflected in the latest GDP figures with manufacturing and the construction sector shrinking in the second quarter. But oil and gas production were likely to have joined the services sector in helping push up growth.

“Services output should do most of the legwork,” said Hare. “The GDP print is likely to point to a two speed economy, with services buoyed by solid domestic demand, while manufacturers suffer from the strong pound.”

Economists are divided over the extent to which households can continue to power the recovery, especially with another round of government cuts on the way.

One consumer survey released on Monday signals UK positivity about job prospects and personal finances are both at their highest levels since before 2008 financial crisis. Market research company Nielsen said its measure of consumer confidence was up for the sixth successive quarter.

“Consumers in the UK are feeling ever more confident. Wage inflation is starting to outstrip price inflation for the first time in years, while mortgage rates are at historically low levels and unemployment has generally been falling,” said Nielsen’s UK & Ireland managing director, Steve Smith.

But other indicators have painted a gloomier picture. Last month there was a surprise drop in retail sales, despite falling prices, and the latest unemployment figures showed the jobless rate rising for the first time in two years.

The Bank of England’s chief economist, Andy Haldane, has warned raising rates too soon could derail the recovery and last week he reiterated his worries.

“For me, the combination of a still-healing economy, very low price pressures and a wobbly world means that there is no rush to move rates from where they are right now,” he told BBC’s Newsnight recently.

The outlook for consumer spending has been cast into further doubt by chancellor George Osborne’s plans for another round of spending cuts unveiled last week.

“There’s certainly some evidence that consumers may be starting to feel a little more nervous about their financial situation,” said Chris Williamson, chief economist at financial information company Markit, whose latest household finances survey flagged up a number of worries among Britons.

So while there are expectations that one or more of the Bank’s nine rate-setters may start voting for a rise as soon as next week’s meeting, their colleagues are likely take longer to be convinced. The earliest point analysts expect an interest rate hike is the turn of the year and financial markets are pricing in a move around February. Beyond that, rates look likely to climb only slowly.

“The tightening of monetary policy is likely to be very gradual given the need to offset the severity of the fiscal squeeze,” said Andrew Goodwin, UK economist at the consultancy Oxford Economics.