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UK Q2 GDP Growth Fastest Since 2001

(RTTNews) – The U.K. economy grew at its fastest pace since 2001 in the second quarter. Better-than-estimated growth was boosted by the construction activity.

Gross domestic product rose 1.2% sequentially in the second quarter, according to revised data published by the Office for National Statistics on Friday. It was the biggest expansion since the first quarter of 2001 and also slightly better than the initial estimate of 1.1%. The second quarter figure follows a 0.3% growth in the first quarter.

Despite these positive figures, it is important to bear in mind that the implementation of the tough deficit cutting programme will inevitably have a serious dampening effect on demand and risks of an economic setback remain, commented British Chambers of Commerce chief economist David Kern.

GDP growth was 1.7% higher than the second quarter of 2009, revised slightly up from 1.6%. Economists were expecting no revisions to the second quarter GDP figures.

Still, the figures cast doubt on the sustainability of the recovery, Samuel Tombs at Capital Economics said. The economist expects GDP to expand by a sluggish 1.5% or so, both this year and next.

Output growth of production industries was left unrevised at 1% in the second quarter on a sequential basis. Within production, manufacturing output climbed 1.6%, but utilities output fell by 1%, and mining and quarrying production dipped 0.4%.

Upward revision in GDP growth was largely led by the construction sector, where growth was revised to 8.5% from 6.6% in the previous estimate. Meanwhile, output growth in the service industries was revised down to 0.7% in the second quarter, yet was higher than the 0.3% in the previous quarter.

On the expenditure side, household expenditure rose 0.7%, reversing a 0.1% fall in the first quarter. On the other hand, growth in government spending eased to 0.3% from 1.5%. Both sectors are very unlikely to maintain such growth rates as the fiscal squeeze kicks in over the coming quarters, said Tombs.

Further, gross fixed capital formation recorded a 2.4% drop compared with last quarter’s 4.5% rise. Inventories rose by GBP 1 billion on the quarter. In the second quarter, the trade deficit in real terms improved to GBP 10.3 billion from GBP 10.4 billion. Exports of goods and services rose 1.1%, whilst imports advanced 0.9%.

As government spending rose only 0.3% and net trade showed only a modest improvement, a big contribution to GDP growth was made by inventory building, noted ING Bank NV’s James Knightley. Moreover, government spending is going to move into negative territory while net trade could suffer if global growth concerns materialise, leading to a heavy burden of growth on investment, the economist noted.

Following a 2.9% increase, the GDP implied deflator gained 4.1% in the second quarter from the same period of 2009.

In the latest quarterly Inflation Report, the Bank of England downgraded its growth outlook. GDP growth is estimated to slow in the third quarter. Economic growth is seen averaging around 3% in two years. In May, the central bank had projected more than 3% growth in 2011.

BoE Governor Mervyn King said the British economy is facing a difficult rebalancing away from private and public consumption and towards net exports. He sees a choppy recovery. It will take several years before the economy adjusts back to anything that can remotely be called as normal, he added.

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