U.K. Economic Growth Quickens to 0.6% as Recovery Gains

U.K. economic growth accelerated in the second quarter as all main industries showed expansion for the first time in three years, indicating Britain’s recovery is gaining traction.

Gross domestic product increased 0.6 percent from the first quarter, when it rose 0.3 percent, the Office for National Statistics said in London today. That matched the median forecast of 37 economists in a Bloomberg News survey. Services, production, construction and agriculture all grew, the first time that has happened since the third quarter of 2010. From a year earlier, GDP rose 1.4 percent.

New Bank of England Governor Mark Carney is preparing to outline the Monetary Policy Committee’s approach to forward guidance on policy next month as he looks to cement the economic rebound. Threats to growth remain, both domestically from the government’s fiscal squeeze and internationally from the tensions in the euro area and a slowdown in China, the world’s second largest economy.

“Evidence is building that the economy is gradually getting back on its feet,” said Vicky Redwood, an economist at Capital Economics Ltd. in London. “The firmer signs make it all the more important that the MPC reassures the markets that interest rates will stay low even as the recovery gathers further momentum.”

The pound erased its gain against the dollar after the data were published, and traded at $1.5303 as of 10:37 a.m. London time, down 0.1 percent from yesterday.

Services, which account for 78 percent of the economy, grew 0.6 percent in the second quarter, adding 0.5 percentage point to GDP, the ONS said. Construction rose 0.9 percent, agriculture surged 1.1 percent and production increased 0.6 percent. Within production, manufacturing expanded 0.4 percent.

Below Peak

In a separate report, the statistics office said services grew 0.2 percent in May from April and increased 1.5 percent compared with a year earlier. While the recession has left U.K. GDP 3.3 percent below its peak in early 2008, services output is only 0.2 percent lower.

The first- and second-quarter expansion mark the first back-to-back periods of growth since 2011. Today’s report is a first estimate and is based on about 44 percent of the data that will ultimately become available for the quarter.

Britain is the first of the Group of Seven nations to report GDP for the second quarter. The U.S. economy, the world’s largest, probably expanded at a 1.6 percent annualized rate in the period, compared with 1.8 percent in the first quarter, according to the median forecast in a Bloomberg survey on July 11. The Commerce Department will publish its advance estimate on July 31.

China Slowdown

In China, Premier Li Keqiang said the nation will speed railway construction and add tax breaks for small companies, adding support for an economy that’s set to expand at the slowest pace in 23 years.

Additional spending would help the economy after the government signaled this week it will protect its 7.5 percent growth target for 2013 following a second quarterly slowdown. Economists surveyed by Bloomberg cut forecasts this month to 7.5 percent, which would be the lowest since 1990.

Elsewhere, German business confidence improved for a third month in July, according to the Ifo institute. Its business climate index rose to 106.2 from 105.9 in June. Economists predicted an increase to 106.1, according to a Bloomberg survey.

U.K. Recovery

In the U.K., strengthening labor-market and retail-sales data in the past month have added to signs that the economy is on the mend.

British Land Co., the U.K.’s second-largest real estate investment trust by market value, said yesterday it’s confident about future profit growth. Chief Executive Officer Chris Grigg said the economy “as a whole is showing some signs of returning confidence.”

The pick-up in the economy may bolster the standing of Prime Minister David Cameron less than two years before the next general election. So far his insistence on sticking to a fiscal squeeze has dented his popularity and his Conservative Party is trailing Labour in polls. GDP is 2.1 percent above where it was in the second quarter of 2010, when the coalition came to power.

“Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend,” Chancellor of the Exchequer George Osborne said. “But there is still a long way to go and I know things are still tough for families.”

‘Right Direction’

Former Chancellor Nigel Lawson said while the GDP data are subject to revision, it’s “quite clear the British economy is now firmly on a recovery path.”

“The recovery is likely to be slower than past recoveries, but it is a recovery,” he said in an interview with Bloomberg Television’s Francine Lacqua in London today. “We’re going in the right direction.”

The ONS will publish its second estimate of GDP on Aug. 23, which will include data on consumer and government spending, investment and exports. In the first quarter, growth was partly due to consumers saving less, underscored by a drop in the savings ratio to the lowest in four years. Households’ debt burden and sluggish wage growth has led some economists to question their ability to contribute to the recovery. Average earnings are growing just 1.7 percent while inflation is running at 2.9 percent.

“Close to 1 percent growth in the first half of this year shouldn’t be sniffed at, even if it is dependent on the sugar rush of low interest rates and rising house prices,” said Rob Wood, an economist at Berenberg Bank in London. “It would be better if it were exports and investment were driving the recovery. But beggars can’t be choosers.”

Carney will next month present the BOE’s analysis on adding forward guidance to its policy arsenal. Officials have already signaled they will keep interest rates at a record low for longer than investors had been betting.

The bank left policy unchanged this month. The Monetary Policy Committee will make its next policy announcement on Aug. 1, and Carney will present its views on forward guidance along with its quarterly forecasts on Aug. 7.

Before it's here, it's on the Bloomberg Terminal.