U.K. economic growth accelerated in the second quarter as higher consumer spending helped to blunt the impact of a drop in business investment.
Household expenditure rose 0.3 percent and disposable income increased 1.5 percent, the most in a year, the Office for National Statistics said today in London. Income was boosted by bonus payments being deferred to take advantage of a tax cut. Gross domestic product advanced 0.7 percent in the quarter, matching a previous estimate.
Britain’s economy has shown further signs of strengthening this quarter after a recession that’s left GDP 3.3 percent below its previous peak. While the recovery is gathering momentum, Bank of England policy makers speaking this week emphasized their commitment to keeping the key interest rate at a record low at least until unemployment drops to 7 percent.
“There are a few disappointments beneath the headlines,” said David Tinsley, chief U.K. economist at BNP Paribas in London. “I don’t think it has a huge bearing on the short-term outlook, but it probably raises some more questions about the sustainability going forward.”
Consumer-spending growth in the quarter was revised lower from 0.4 percent in the previous GDP estimate. It still added 0.2 percentage point to GDP, the ONS data showed. Compensation of workers surged 3.4 percent, the most since the data series began in 1987. The deferral of some bonuses coincided with Chancellor of the Exchequer George Osborne’s reduction in the top rate of income tax to 45 percent from 50 percent.
Business investment dropped 2.7 percent from the first quarter and was down 8.5 percent from a year earlier. The ONS had estimated that investment rose 0.9 percent in the previous GDP report.
The pound fell against the dollar after the data were published and traded at $1.6053 as of 11:22 a.m. London time, down 0.2 percent from yesterday.
Separate data showed the current account deficit narrowed to 13 billion pounds in the second quarter from a revised 21.8 billion pounds in the previous three months. The first-quarter figure was a record, based on records going back to 1955.
Government spending rose 0.5 percent in the second quarter after a 0.2 percent drop in the first three months of the year. Exports were up 3 percent and imports increased 2.9 percent. Net trade made a zero contribution to GDP in the quarter. That’s down from a previous estimate that net trade added 0.3 percentage point to GDP.
In the quarter, construction growth was revised up 0.5 percentage point to 1.9 percent, while manufacturing was revised 0.2 percentage point higher to 0.9 percent, putting total production growth at 0.8 percent. All three grew the fastest in three years. Services, which comprise about three-quarters of the economy, were unchanged.
“The prospects for the remainder of this year look better than we’ve seen for a number of years,” said Lee Hopley, chief economist at manufacturing trade group EEF. “Less positive, however, was the downgrade to business investment. This again highlights the rebalancing challenge for the U.K.”
In the U.S., GDP probably rose at a 2.6 percent annualized rate in the second quarter, according to the median of 79 economists in a Bloomberg survey, up from the previous estimate of 2.5 percent. The Commerce Department will release the figures at 8:30 a.m. in Washington.
The U.K. savings ratio in the three months through June rose to 5.9 percent from 4.4 percent. Debenhams Plc Chief Executive Officer Michael Sharp said this month that the retail market remains “competitive” and “consumers’ disposable income remains under pressure.”
Britain is in the midst of its political party conference season less than two years before the next general election, with the opposition Labour Party concluding its meeting in Brighton, England yesterday. Party leader Ed Miliband accepted a recovery was under way while criticizing its speed, saying it was the slowest for 100 years.
Labour’s lead over Prime Minister David Cameron’s Conservative Party has narrowed to single digits over the past year, with the government benefiting in part from the stronger economy. Today’s data shows GDP is 2.2 percent higher than it was when Cameron’s coalition came to power in 2010.
The Tories will meet in Manchester next week. Their junior partners, the Liberal Democrats, concluded their conference in Glasgow last week with leader Nick Clegg saying his party has ensured the recovery is stable.
In today’s ONS report, economic growth in the first quarter of 2013 was revised to 0.4 percent from 0.3 percent. GDP data for third quarter of 2012 was revised to 0.6 percent growth from 0.7 percent. The fourth quarter was revised to a drop of 0.3 percent from a decline of 0.2 percent. For all of 2012, growth was revised to 0.1 percent from 0.2 percent.