Preliminary estimates of GDP growth for between April and June 2010 showed the economy grew by a huge 1.1% – It now appears that the economy is bouncing back strongly, with almost every sector making a positive contribution…
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– In reaction to the news, sterling rose 0.4% against the US dollar
– While we expect growth to moderate, we also believe that there is now enough momentum built up to avoid a double-dip recession.
Economists, commentators and the markets have been collectively wowed by UK GDP figures released. Preliminary estimates of GDP growth for between April and June 2010 showed the economy grew by a huge 1.1%, which is a tremendous rebound from the disappointing 0.3% growth achieved in the first quarter. This is the fastest period of growth for four years.
The City (ourselves included) had expected an improvement of 0.6% growth, but the latest estimates are a very positive surprise which should provide a boost to consumer confidence heading into the second half of the year. The UK economy had a poor start to the year with bad weather affecting activity, and the increase in VAT to 17.5% hitting retail sales. It now appears that the economy is bouncing back strongly, with almost every sector making a positive contribution.
In terms of sectors, the business and financial services sectors grew at their fastest pace since the third quarter of 2007. Combined with the 6.6% growth from the construction sector, the two contributed a huge 0.8% towards the 1.1% headline figure. The only sector to make a negative contribution was the transport, storage & communication sector, which contracted by 0.7%.
In reaction to the news, sterling rose 0.4% against the US dollar, while the yield on 10-year gilts increased from 3.37% to 3.44% at the time of writing.
Though the latest growth estimates are very encouraging, we doubt we will see a repeat performance in the second half of the year. While we expect growth to moderate, we also believe that there is now enough momentum built up to avoid a double-dip recession.
As for monetary policy, this should make the ‘Sentence-versus-King Debate’ even more interesting. Dr Andrew Sentence, an external member of the Bank of England’s Monetary Policy Committee, continues to argue for an increase in interest rates, while Governor Mervyn King is determined to keep rates low. Clearly there is now little evidence to support the idea of any additional stimulus in the form of quantitative easing, and Andrew Sentance’s view that interest rates should rise soon, has just gained more weight.
Important Information:
The views and opinions contained herein are those of Azad Zangana, European Economist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisers only. This document is not suitable for retail clients.
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