UK economic growth remains lacklustre in second quarter

UK economic growth remained tepid in the second quarter, according to the Office for National Statistics, though the initial estimate for gross domestic product was in line with economists' forecasts.

GDP grew 0.3% in the second quarter of the year, up only slightly from the disappointing growth of 0.2% in first quarter but in line with the consensus forecast.

Year-on-year, GDP rose 1.7%, also as expected, but down from the 2.0% in the previous quarter.

ONS said economic growth was driven by the services sector, notably the retail and film sectors, with construction and manufacturing acting as a drag.

GDP per head was estimated to have increased by 0.1% during the quarter.

Employment rate reached a record high of 74.9% during the second quarter, while total real wages fell 0.7% compared with a year earlier, which was the most since August 2014.

Although the second quarter GDP matches the Bank of England's May inflation report, the uninspiring growth in the first half of the year -- half that seen in the latter part of 2016 -- will mean hitting the full year prediction for GDP growth of 1.9% will require a steep improvement in the second half of the year.

NOT GREAT BUT AS EXPECTED

The pound was little moved against the dollar at just over 1.30, and retreated slightly from an early rise against the euro to 1.1199, a rise of 0.1%.

The GDP figure was "not great, but completely as expected... coupled with the recent fall in inflation there is little cause for the Bank of England to alter course in August", was the overview from analyst Neil Wilson at ETX Capital.

"The good news is that the worst of the exchange rate induced inflation should start to roll off year-over-year figures from now on, which can offer support to the key retail and services sectors."

The Bank of England is likely to revise down its forecasts for the economy next week, said Chris Williamson at IHS Markit, who is currently forecasting just 1.4% growth.

He agreed that the confirmation of the lackluster performance of the economy so far this year "surely" diminishes the chance of an interest rate hike "any time soon".

Growth prospects for coming months have become increasingly skewed to the downside, Williamson noted, with recent IHS surveys finding continued deterioration in households' views of their finances in July, with appetite to make major purchases, such as holidays, cars and expansive household goods, deteriorating at the steepest rate for three years.

Looking behind the headline GDP numbers, economist Sam Tombs at Pantheon Macroeconomics said the economy has little momentum due to low wages hitting consumer spending and businesses holding back from spending due to Brexit risk.

"Industrial production and construction output fell by 0.4% and 0.9% quarter-on-quarter, respectively, so growth was entirely dependent on a 0.5% rise in services output.

"Note that the increase in services output hinges on the assumption that output rose by a healthy 0.3% month-to-month in June; this is a forecast made by the ONS, which will be revised in time."

BIGGER PICTURE

Although the GDP estimate matches the MPC’s May report, "the weak performance in the industrial sector suggests that the economy is not rebalancing towards net trade and investment, which Mark Carney wants to see before raising interest rates", Tombs said, adding that hawks on the committee were hoping for stronger growth in line with the 0.6% or so rate implied by business surveys, so a low GDP print "clips their wings".

Looking ahead, Tombs doubts that the economy will regain momentum in the second half of 2017, expecting quarter-on-quarter GDP growth to average just 0.2% in the second half of 2017.

"Retailers haven’t fully passed on higher import prices to consumers yet, so the squeeze on real wages has further to run. Meanwhile, firms likely will continue to stockpile cash instead of investing while the outcome of Brexit negotiations remains uncertain. Hopes of a trade boost also will continue to go unfulfilled, since price rises by exporters have meant that their competitiveness has improved only marginally."

James McCann, senior economist at Standard Life Investments, looked at the bigger picture and said a business cycle indicator built from a wide range of economic and financial data looked encouraging.and highlighted divergences across Eurozone member states, with Germany being flagged as more advanced in its cycle, while France, Italy and Spain are lagging with ample spare capacity.

“Business cycles do not die of old age, rather they come to a painful end as a trigger forces the unwinding of financial and/or economic imbalances.

"There are reasons to believe the next global downturn could be onerous, making it even more critical to spot this well ahead of time.

McCann's current conviction is that the global economy will grow "modestly above trend this year and next" and advised investors that it was "a good time...to extend their time horizons" but guard against complacency.

"Although monetary and financial factors are easy to capture in our framework, geopolitical factors are not.”