UK GDP grows by unexpected 0.5% in June

GDP is estimated to have grown by 0.5% in June, beating market predictions of 0.2% growth.

The latest ONS statistics show that, as a result, the UK economy increased by 0.2% in Q2.

Monthly growth in June follows a fall of 0.1% in May and growth of 0.2% in April.

In output terms, the services sector grew by 0.1% on the quarter, driven by increases in information and communication, accommodation and food service activities, and human health and social work activities. Elsewhere, the production sector grew by 0.7%, with 1.6% growth in manufacturing.

In expenditure terms, there was strong growth in household consumption and government consumption, which was partially offset by a fall in international trade flows in the second quarter.

Jonathan Moyes, head of investment research at Wealth Club, commented: “It was pleasing to see the UK produce a more upbeat 0.5% for June, this was much stronger than consensus forecasts, which called for around 0.2% growth. On a quarterly basis, the economy remains in the slow lane, with GDP up 0.2%. This is the sixth quarter in a row where growth was 0.2% or less.

"The UK is by no means out of the woods. June’s hot weather flattered the growth figures, this get out of jail free card will only be played the once. A dismal July and August is likely to weigh on consumer spending for Q3. Add to this the UK’s dominant services sector showing signs of slowing, and it is a challenge to reconcile how the UK economy can escape a recession after such a steep rise in interest rates.

"However, forecasters have long predicted a recession that has yet to arrive. The economy may continue to find a way to muddle through. News of wage growth surpassing inflation for the second half of the year May provide the confidence the economy needs to avoid falling into recession.”

Derrick Dunne, CEO of YOU Asset Management, said: “The UK economy has grown for the second quarter running, following a 0.1% rise last quarter.

“There has been heavy reliance on the consumer services sector this quarter. But a notable uptick in the production and construction sectors this month has pushed GDP growth.

“But while today’s data may see the UK narrowly escaping a recession, there is a long way to go until growth is at its pre-pandemic level.

“It is hard to escape the fact that the second half of 2023 will continue to be influenced by the direction of both inflation and interest rates. The end game for policymakers is to engineer an environment that has been dubbed ‘Goldilocks’ and has inflation, interest rates, and growth at levels which are deemed to be not-too-hot and not-too-cold.

“But with the effects of the aggressive rate hiking cycle likely to soon start feeding through to the economy, this will be no easy task.”

Marcus Brookes, chief investment officer at Quilter Investors, added: “Earlier this week the National Institute of Economic and Social Research published forecasts that predicted the UK is facing five years of economic stagnation, and looking around you can see why such pessimistic views are percolating, despite the slightly better than expected GDP numbers this morning. UK GDP rose 0.5% in June and grew in the second quarter, with just a 0.2% increase. However, interest rates take a while to feed into the economy, but it is clear that they may be starting to have an effect. While there is unlikely to be one this year, the UK can still be put on recession watch for 2024 as it seeks to resolve its more unique set of economic circumstances.

“This all puts the Bank of England in a difficult period right now. Prior to this it was fairly easy to understand rate rises while inflation was on the way up and the labour market remained tight. But inflation is now on the way back down, albeit slower than most would like, and the economy is beginning to teeter. The Bank of England now needs to ask itself if more rate increases are really necessary. The market expectations have pared back from as high as around 6.5%, and we certainly don’t see a need to go above 6%. Looking globally the US Fed is at a point where it could probably have a prolonged pause, and this option will need to be considered by the Bank of England as the delayed effects of previous rate rises continue to slow the UK economy.

“Crucially, though, we are getting towards the start of proper election campaigning, and the state of the economy is likely to be the number one issue. Rishi Sunak and Jeremy Hunt will be hoping to turn things around quickly, but unfortunately, the economic gloom may be here to stay for a little while longer.”