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UK growth accelerates to 0.7% as services, oil surge

[LONDON] UK economic growth accelerated in the second quarter as business services and finance strengthened and North Sea output surged.

The 0.7 per cent increase in gross domestic product marked a 10th straight expansion and followed a 0.4 per cent advance in the previous three months. It was in line with the median forecast in a Bloomberg survey.

The report suggests the recovery remains lopsided and led by the dominant services industry, where growth accelerated to 0.7 per cent. While oil and gas helped industrial output rise 1 per cent on the quarter, the most since the end of 2010, manufacturing declined 0.3 per cent. Construction was unchanged.

"After a slowdown in the first quarter of 2015, overall GDP growth has returned to that typical of the previous two years," Joe Grice, chief economist at the Office for National Statistics, said in a statement issued with the data in London on Tuesday. The rebound takes GDP per head "back to broadly level with its pre-economic downturn peak" in the first quarter of 2008, he said.

The pound rose after the data and was trading at US$1.5559 as of 9:32 am London time, unchanged from Monday.

With the UK economy in its longest period of continuous growth since before falling into recession in 2008 and unemployment falling, Bank of England Governor Mark Carney has said the time of record-low interest rates may soon end. He's also said any tightening will be gradual, citing headwinds from the government's fiscal program and weak euro-area demand.

The ONS data is a first estimate and may be revised. It's based on about 44 per cent of the information that will ultimately be available. Compared with a year earlier, GDP grew 2.6 per cent. Output is now 5.2 per cent above its pre-recession peak.

Services, the largest part of the economy, accounted for 0.5 percentage point of the increase in GDP in the second quarter. It was driven by business services and finance, which had contributed nothing in the first three months of the year.

On an annualised basis, the economy grew 2.8 per cent. The US economy probably grew an annualised 2.5 per cent in the March-June period, according to a Bloomberg survey of economists before data later this week.

GDP is projected to increase 2.5 per cent in 2015 and 2.3 per cent in 2016, according to economists in a Bloomberg survey.

The strength of the pound continues to drag on exports, with even the BOE warning of this could have an "adverse impact on the balance of growth in the economy." North Sea output is a volatile component of GDP and the ONS said tax incentives announced by Chancellor of the Exchequer George Osborne earlier this year may have boosted output in the second quarter. Mining and quarrying, of which North Sea output accounts for the majority, jumped 7.8 per cent, the most since 1989.

The Confederation of British Industry said on Monday that its index of manufacturing orders dropped to a two-year low in July and that export growth remains "sluggish."