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Recession fears ease as UK economy grows faster than expected

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
A worker irons the leather on a seat at Bentley's manufacturing facility in Crewe, Britain October 15, 2018. Picture taken October 15, 2018.   REUTERS/Darren Staples
A worker irons the leather on a seat at Bentley's manufacturing facility in Crewe, UK. Photo: Darren Staples/Reuters

Fears of a UK recession eased on Monday as new data showed better than expected economic growth in July.

The UK economy grew by 0.3% between June and July, according to the Office of National Statistics (ONS). Economists had forecast month-on-month growth of 0.1%, up from 0% in June.

“Barring a serious relapse in August and September, this suggests that the UK should avoid falling into a technical recession in the third quarter,” PwC’s chief economist John Hawksworth said.

A recession is defined as two consecutive quarters of recession. The UK economy shrank by 0.2% in the second quarter of the year and July marks the start of the third quarter.

The uptick in growth in July was driven entirely by the service sector, which covers everything from hospitality to banking and is the biggest part of the UK economy.

Rob Kent-Smith, head of GDP at the ONS, said: “While the largest part of the economy, services sector, returned to growth in the month of July, the underlying picture shows services growth weakening through 2019.”

The GDP growth estimate was published alongside data on the UK’s manufacturing and industrial sector, which also beat forecasts.

Industrial production grew by 0.1% month-on-month in July, against a forecast of 0.1% decline. Manufacturing production grew by 0.3% month-on-month in July, against a forecast of a month-on-month fall of 0.1%.

“While the figures are from from stellar, after a contraction in the second quarter the chances that we see a negative GDP print in the third have now dropped significantly, meaning that a technical recession will likely be avoided,” said David Cheetham, the chief market analyst at trading platform XTB.

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said ahead of the data that he was confident the UK would avoid a technical recession and predicted August would show a further uptick in industrial and manufacturing activity.

“GDP should surge in August, when car plants did not down tools as usual for annual maintenance, because producers had shifted their shutdowns to April to minimise the potential costs of a no-deal Brexit after the original deadline,” Tombs wrote.

“In addition, manufacturers likely will rebuild inventories towards the end of Q3, despite the Brexit extension bill, as orders likely were placed several weeks in advance.”

Tombs expects GDP to grow by 0.4% in the third quarter, which is higher than most City economists.