Comment: GDP boost adds pressure on BoE

Martin Flanagan. Picture: Fiona Hanson
Martin Flanagan. Picture: Fiona Hanson
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THE bounceback in UK growth in the second quarter, although anticipated by the markets, is still likely to shorten the odds on an interest rate rise in the nearer term. Gross domestic product rose a pretty robust 0.7 per cent in the three months to June, compared with a disappointing 0.4 per cent in the first quarter of this year.

With inflation still much under control and the eurozone’s travails continuing to be an unpredictable element for the UK economy, many in the City had not expected a rate rise from historic lows until the second quarter of 2016.

But Bank of England governor Mark Carney put the cat among the pigeons recently by saying – against a backcloth of rising wages, low unemployment and economic growth – that a decision on when to raise rates might in reality now assume sharper focus around the turn of this year.

Yesterday’s figures will underscore the effect Carney had. And yet there is still enough evidence to suggest that any decision to move on rates remains finely balanced.

The trusty services sector, plus a strong performance from the energy, mining and quarrying sectors, powered the second quarter’s economic performance.

But manufacturing, still hobbled by a challenging exports environment, particularly to the eurozone, shrank by 0.3 per cent – its worst performance in two-and-a-half years. Construction also continues in the doldrums, its better turn during 2014 increasingly looking like something of a false dawn.

Rate hawks on the Bank of England monetary policy committee (MPC) will turn gimlet eyes on Britain’s GDP per head now being back to where it was at its pre-recession peak in the first quarter of 2008.

That development has strong psychological value in assessing whether the “seven lean years” for Britain predicted by former Bank of England governor Mervyn (now Lord) King are truly over and a rate rise would be appropriate.

At the very least it will focus extra strong attention on the third-quarter data. If that surprises on the upside as well, it could be that even the problems besetting manufacturing and the eurozone will not be enough to prevent an earlier monetary tightening than was expected.