The UK economy has been growing at a steady pace and above the pre-crisis levels so far, while economic and market headwinds from both Europe and Asia persist.
The second official GDP estimate is projected to show the UK economy grew at a rate of 0.7% between the first and second quarters. The UK's Office for National Statistics (ONS) is releasing the figures on Friday, August 28.
The first estimate showed the primary driver in second-quarter growth was the robust services sector. Significant help also came from oil and gas extraction from the North Sea, with the output in mining and quarrying surging by 7.8% - the strongest since 1989 - and up from a decline of 0.5% in the previous three months.
Oil and gas production from the North Sea can be significantly volatile, so the fact that this sector was among the primary drivers in the second quarter suggested how fragile and unbalanced the UK economy remained during the measured period.
In its August Inflation Report, the Bank of England (BoE) said that "while the strength in energy sector output growth in Q2 is unlikely to be repeated, growth in service sector output is expected to continue to increase back towards its average rate, as consumption continues to grow at a robust pace." The BoE expects a growth rate of 0.7% in both the second and third quarters of this year, consistent with the preliminary estimate of 0.6% in the third quarter.
Household consumption is expected to continue to spur growth in the UK while inflation remains close to zero, and real earnings are rising. But there are risks to those expectations, with some forecasters warning domestic spending could deteriorate once the BoE begins to raise its base interest rate from the record low of 0.5%, given the burden of household debt and rising house prices.
The latest official data also confirmed total retail sales had slowed during the second quarter to 0.7% growth, down from 0.8% measured in the first three months of this year. Despite slowing, quarterly growth should still have a positive contribution to second-quarter GDP, by approximately 0.04%.
Both NIESR and CBI expect the BoE to begin increasing the base interest rate in the first quarter of 2016, although the latest wave of increased volatility spilling over from Asia may suggest a bit of a caution on those expectations. A stronger sterling and a persistent drag in the euro zone are also expected to continue to hurt UK exports.
In its latest outlook, NIESR said it expected UK GDP to slow down in the third quarter, but it still sees growth of 2.5% this year, and close to this rate throughout the forecast period. The CBI revised up its outlook for the UK economy to rise 2.6% this year, before accelerating further to 2.8% next year, driven primarily by rising business investments and productivity, and robust domestic demand.
Chinese volatility spreading across the rest of the global markets is increasing the level of risk to the current outlooks.
While on his Nordic tour this week, UK Chancellor George Osborne said "… stock market falls [in China] reflect deeper concerns regarding the Chinese economy, which is why their reforms are so important."
Osborne also warned about Britain's exposure to Asian headwinds: "Britain is a very open economy, we are probably the most open of the world's largest economies. And so we are affected by what happens; whether it's problems in the eurozone, problems in Asian financial markets."
The BoE policymakers have so far not responded publicly to the Asian volatility. Market participants will probably have to wait until Saturday this week, when BoE Governor Mark Carney speaks in Jackson Hole. More detailed sentiment is then expected on September 10, when the BoE's nine-strong rate-setting committee meets to decide on its monetary stance for September, and also publishes the MPC Minutes the same day.
In the August MPC Minutes, the BoE policymakers judged that "[Asian equities] volatility was likely to have little direct impact on domestic demand in China, where equities accounted for only a small fraction of household wealth."
They warned "there could, however, be broader effects on confidence, both within China and beyond, especially if concerns were to grow about the ability of the Chinese authorities to manage a smooth transition of the economy to a more balanced and sustainable composition of demand, and to financial sector liberalisation."
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