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British economy holds up against Brexit headwinds

[LONDON] Britain's economy advanced slightly in the second quarter, pulled higher by the key services sector despite high inflation and uncertainty over Brexit, official data showed Wednesday.

Gross domestic product grew by 0.3 per cent between April and June, a slight increase compared with the first quarter of the year, the Office for National Statistics said in a statement.

GDP had stood at 0.2 per cent growth between January and March, the ONS confirmed, while the improved second-quarter reading matched analysts' consensus forecast.

The data comes shortly after the International Monetary Fund downgraded its 2017 growth estimate for Britain on Brexit's clouded outlook.

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The ONS on Wednesday said that UK growth in the second quarter had been "driven by services, which grew by 0.5 per cent" largely thanks to the retail sector.

"Construction and manufacturing were the largest downward pulls on quarterly GDP growth, following two consecutive quarters of growth," the ONS added in its statement.

At the weekend, the IMF revised down its 2017 GDP forecast for Britain by 0.3 points to 1.7 per cent following weaker-than-expected activity in the first quarter, while noting also that the impact of Britain's exit from the European Union "remains unclear".

Britain's annual growth rate stood at 1.7 per cent in the second quarter, down from two per cent in the first, the ONS added Wednesday.

Britain's economy is under pressure as high domestic inflation cuts consumer spending and raises household debt.

The rise in prices sits alongside weak average earnings growth in the country, reducing the chances of an interest rate hike from the Bank of England this year, that would mirror the policy of monetary tightening in the United States.

"We do not expect the BoE to change... at the August meeting, though the first hike is probably getting a little closer," noted Alan Clarke, head of European fixed income strategy at Scotiabank.

"An upwards revision to the Bank's inflation projection and downwards revision to the unemployment rate will signal that the door is still open to a rate hike later in the year, should the growth data improve," he added in a client note.

The latest quarterly reading of 0.3-per cent growth "confirms that the economy has little momentum because consumers are enduring falling real wages (on high inflation) and businesses are holding back from spending due to Brexit risk", said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

British GDP slowed in the first quarter after output of 0.7 per cent in the final three months of 2016.

British inflation is meanwhile being supported by a Brexit-fuelled slump in the pound pushing up import costs - although the annual rate managed a slowdown to 2.6 per cent in June from a near four-year high of 2.9 per cent in May.

"The good news is that the worst of the exchange rate induced inflation should start to roll off... which can offer support to the key retail and services sectors," said Neil Wilson, senior market analyst at ETX Capital.

AFP

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