Key points

  • The UK economy has defied all odds and posted an impressive 0.2% growth despite projections that it would contract in Q2.
  • The growth came as household expenditure rose in tandem with manufacturing output.
  • Economists still fear the effects of high-interest rates are not fed through, and pain is yet to be lifted from British markets.

UK economy has seen a surprise 0.2% growth in Q2 as manufacturing output and household expenditure rose though the effects of high-interest rates are still shaking the markets.

UK posts a Q2 2023 surprise growth

The UK has been on the verge of a reversed economic growth this year following its January 2020 Brexit and the post covid 19 economic challenges. The country has been battling high inflation rates of up to 12%, which has necessitated the introduction of tighter banking measures.

The BoE has hiked interest rates making borrowing more expensive for nationals and investors in Britain. While the interest rates are working to bring down the inflation levels, the economy has been hit by pain in its markets. More and more households cannot afford to pay their mortgages, while businesses have been cutting their expenditures.

These economic outlooks were expected to drag the UK economy into contraction in Q2, only to bounce back with an impressive 0.2%. The jump is due to increased manufacturing output and spending rates.

The economy expanded by 0.5% in June, beating a forecast of 0.2% and monthly GDP growth of 0.1% in May and 0.2% in April. Manufacturing output grew by an impressive 1.6%, production followed by 0.7%, and services posted a fair 0.1% growth.

On Friday, the Office for National Statistics report said that the strong growth in household and government consumption in terms of expenditure faced price pressure over three months though it was moderated in the previous quarter.

Recession bloodbath fears still looming

Though the UK economy still has ‘legs, ’ the effects of high-interest rates are not necessarily over. BoE hiked rates by 25 basis points in August to 5.25%, and inflation is still running wild, meaning further hikes will be necessary. The UK inflation rates are the highest, around 7.9%, which means the government will not meet its 2% target for the year till Q4 2024.

As such, policymakers will observe the market ahead of the September rate hike decision meeting. Ruth Gregory, deputy chief U.K. economist at Capital Economics, said in a Friday note that the consultancy still forecasts a mild recession for the country later in the year as the impact of higher interest rates is felt.

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