UK Growth Higher-than-Expected, Though Forecasted Path Remains Sluggish

The UK economy grew greater than expected over the second quarter of 2023, expanding 0.2% and beating forecasts of 0% growth. The stronger-than-expected print raises convictions that the UK economy may avoid a technical recession and is more resilient to the Bank of England’s monetary tightening cycle than expected. While Q2’s marginal growth is a bullish indicator vis-à-vis the UK’s post-pandemic recovery, quarterly GDP remains 0.2% below its pre-Covid peak.

Behind the print, this morning’s data indicates that the services sector grew 10bps, with the UK’s film and TV industry driving some of this increase. Live events also helped fed into the expansion of the services sector, especially given the strong weather seen over June. Meanwhile, the country’s production sector rose by 0.7%, while manufacturing expanded 1.6%. Household consumption similarly expanded 0.7% as families continued to spend on recreation and culture, dining and hotels.

The ONS also indicated that government investment sunk 6.7% as the Treasury looks to slow down spending. Earlier this year, we saw how public sector debt has surpassed more than

100% of GDP, marking the first time this has happened since 1961. Business investment also failed to match forecasts, coming in at 6.7% against expectations of 8.1% as the cost of borrowing reaches fresh 2008 highs after 14th consecutive rate hikes.

As well as beating market forecasts, today’s print also exceeds Threadneedle Street’s projections of 0.1% growth. Q2’s growth follows quarter-on-quarter growth of 0.1% seen during the first three months of the year. Last week, the Bank of England’s monetary policy report noted that while they are no longer forecasting a recession, output will continue to remain sluggish over the next two years. Such projections views are of course a considerable improvements from their assessments last year which pointed to eight consecutive quarters of economic contraction (starting in Q4 2022). As such, the UK economy – like many of its European and North American counterparts – is expected to see a ‘softer-than-expected’ landing. In light of the print, expectations for the Bank of England’s next rate decision remained more or less unchanged, with money markets pricing in around a 85% chance of a 25bps hike on 21 September.