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Services drive UK economic rebound

The UK economy rebounded in the three months to the end of May following its weak start to the year, official data showed this week.

The economy expanded 0.2% in the three months to the end of May, having seen no growth overall between February and April, according to the Office for National Statistics (ONS).

Growth of 0.4% in services drove the recovery, while manufacturing and construction contracted 1.2% and 1.7% respectively over the three-month period.

Rob Kent-Smith, ONS Head of National Accounts, said: "Retailing, computer programming and legal services all performed strongly in the three months to May while housebuilding and manufacturing both contracted. Services, in particular, grew robustly in May with retailers enjoying a double boost from the warm weather and the royal wedding."

“We are witnessing a rebound”, said George Buckley, chief UK economist at Nomura, adding that the recovery “has legs”, with wage growth now outpacing inflation

The data makes it more likely that the Bank of England will raise interest rates at its August meeting, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“Today’s report should leave the Monetary Policy Committee confident that quarter-on-quarter GDP growth likely will rise to 0.4% in Q2 [April to end of June], matching its forecast,” he said.

In other official data, the UK’s trade deficit widened by £5bn to £8.3bn in the three months to the end of May as exports of cars fell.

Meanwhile, the government published its proposal for a post-Brexit partnership with the European Union. The proposed “association agreement” would recreate many aspects of the existing economic relationship between Britain and the EU for goods and services.

The plan sparked the resignations of senior ministers Boris Johnson and David Davis.

The US-China trade war looked set for further escalation, with Donald Trump announcing plans to impose tariffs on an additional $200bn of Chinese imports - and China threatening retaliation.

The European Commission blamed growing trade tensions as it lowered its growth forecast for the euro area to 2.1% for this year, down from 2.3% in May. Its forecast for Germany saw one of the biggest downgrades, to 1.9% from 2.3% previously.

The commission said that the risk of a trade war with the US was already affecting the economy, and that “a further escalation in trade protectionism…remains a serious downside risk that could derail global growth over the forecast horizon and beyond”.

Donald Trump has threatened to hit Europe’s car sector with heavy tariffs, and has already targeted imports of steel and aluminium.

The commission is also concerned about the knock-on effects from US-China trade strife. “While the direct macroeconomic effect of the measures implemented so far are likely to be rather limited, the broader impact on confidence and investment decisions could be much more significant and immediate,” it said.

 

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Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

 

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