Strong growth set to raise pressure on interest rates

In the second quarter, Britain’s GDP was estimated to have been 5.2 percent higher than the pre-economic downturn peak of Q1 2008, said ONS.

Tuesday’s figures underscored how Britain’s dominant services sector is driving growth.

‘Admittedly, growth remains very unbalanced, but at least it looks as though productivity growth is continuing to pick up. Earnings growth should strengthen further while consumer price inflation should still be relatively muted compared to past norms despite likely trending up gradually during the year (it is forecast to average 1.6 per cent in 2016 after 0.3 per cent in 2015).

She added: “Accordingly, although [the GDP] data may give some ammunition to the more hawkish members of the [Monetary Policy] Committee, we still think that a rate rise will be delayed until next year”. Manufacturing which is a sub-sector of industrial production, contracted over the quarter, highlighting the difficulties manufacturers are facing with the strength of sterling hitting export demand.

“Our economic growth really should be much stronger than this, especially with some of the mounting instability in the European economies, China, worldwide”. The services sector drove the rise in GDP, while construction output was flat and manufacturing output fell.

Another report from ONS said the latest index of services suggested that output increased by 0.3% in May from April, when it climbed 0.2%.

The services sector rose 0.7% – contributing 0.5 percentage points of the increase – while production was up by 1% and agriculture decreased by 0.7%. The monthly growth rate came in line with expectations.

The promising data has increased speculation over the timing of the Bank of England’s first interest rate hike, with governor Mark Carney previously indicating that quarterly growth of more than 0.6 per cent could be supportive of a rate rise.

Ipek Ozkardeskaya, analyst at London Capital Group noted that the UK is now powering ahead of the US in terms of the rate of economic growth, and remains comfortably ahead of the Eurozone.

He said that with the economy recovering, wages rising and high numbers of people in employment, interest rates would have to rise to help control inflation.

TUC general secretary Frances O’Grady said: “The Government’s economic plan is not delivering what was promised”.

“We were told there would be a march of the makers, but instead manufacturing continues to decline”.

“Today’s figures show we need a more balanced recovery, with construction output weak for the past nine months”.