GDP rises more than expected but Brexit slowdown already apparent

UK economic growth accelerated slightly more than expected in the second quarter, though the official data showed a significant loss of momentum even before the Brexit decision began to take effect and so may not be enough to stop the Bank of England from cutting interest rates next week.

Gross domestic product increased 0.6% in the three months to the end of June compared to the first quarter, according to a preliminary estimate from the Office for National Statistics, better than the forecast 0.4% rise.

Compared to the same period last year, GDP rose 2.2%, up from the 2% year-on-year growth in the first quarter and better than the 2.1% the market had expected as well as the best outturn for four quarters.

The increase was largely due to an exceptional April performance across the economy, with the quarterly reading driven higher by a strong performance from industrial production, which enjoyed a quarterly increase of 2.1% to counteract the rest of the economy slowing.

Construction output fell by 0.4%, down from a 0.3% drop in the first quarter, and services sector output slowed to 0.5% from 0.6% in the prior period.

“The monthly figures point to a significant loss of momentum through the quarter which means that the launchpad for Q3 was already soft, even before we factor in any Brexit effects," said Martin Beck, senior economic advisor to the EY ITEM Club, though he felt the economy may avoid a technical recession.

He added: “GDP growth in Q2 looks likely to represent one last hurrah for the economy before it enters a softer and more turbulent period. The lack of momentum as the economy entered Q3 means that the chances of a negative reading for the current quarter are relatively high.”

Sam Tombs at Pantheon Macroeconomics agreed that the growth figure was not as robust as it seemed at face value "and it won’t hold back the MPC from cutting interest rates next week".

He noted that the ONS's preliminary estimate relies on less than half of the data content that will be available for the final estimate, "so it is liable to be revised down", while most recent economic survey data of UK activity and confidence since the referendum suggest GDP is on course to contract in the third quarter.

"The outlook for above-target inflation in 2017 and 2018, however, due to sterling’s depreciation, suggests that the MPC probably will just cut interest rates to 0.25% from 0.50%, and hold back from unconventional stimulus measures for now," Tombs concluded.

Sterling was down 0.2% to 1.3104 against the dollar having initially spiked higher on the release of the forecast-beating headline number.