The UK economy is resilient, but more rate hikes are on the way

Mortgage holders are in more pain as stronger-than-expected economic growth in the UK increases the likelihood of more rate hikes.

The economy rebounded in June and grew by 0.5 percent after a 0.1 percent decline in May, when output was squeezed by the additional coronation holiday, according to the Office for National Statistics (ONS).

The ONS pointed to warm evenings, cold pints and stadiums full of screaming music fans at Beyonce and Harry Styles concerts as drivers of growth. A surprising boost in production also helped.

“The measures we are taking to fight inflation are starting to take effect, which means we are laying the strong foundations needed to grow the economy,” said Chancellor Jeremy Hunt.

UK inflation data for July is due next Wednesday and is expected to show that the pace of price increases has cooled to 6.5 per cent last month from 7.9 per cent in June.

But the rise in growth showed that consumers held up better than expected, despite interest rates hitting their highest level in 15 years as the Bank of England struggles to curb skyrocketing inflation, which is well above its target of 2 percent remains.

It means the central bank has more “leeway” to consider further rate hikes to cool the economy and rein in consumer spending to lower prices.

Neil Birrell, chief investment officer at asset manager Premier Miton, said: ‘The GDP data is giving the Bank of England a headache. They may have thought about stopping the rate hike soon, but with these data it will be more difficult.”

Concerns about further price gains hit trading in the Square Mile, with the FTSE 100 falling 1.2 percent, or 94.44 points, to 7524.16.

The Bank of England is still forecast to raise rates at its next meeting as gross domestic product (GDP) rose 0.2 percent in the second quarter of this year, compared to 0.1 percent in the first three months of 2023 and slightly earlier than last year. previous forecasts.

UK growth was ahead of other developed countries such as Italy and Germany, which fell 0.3 percent and flat growth in the second quarter respectively, but lagged the US and France, which grew 0.6 percent and 0.5 percent respectively. per cent.

Data shows that 70 percent of traders expect the bank to raise rates by 0.25 percentage points to 5.5 percent next month.

Following the better-than-expected GDP data, the cost of UK government debt also rose, with yields on two-year government bonds, which are sensitive to interest rates, rising by about 0.07 percent to 4.96 percent. The pound, meanwhile, rose 0.5 percent to $1,273 against the dollar. But some economists warned that the effects of past rate hikes have yet to be fully felt by the economy and that despite all expectations, the UK could still slide into recession.

Ruth Gregory, UK deputy chief economist at research firm Capital Economics, said: ‘A recession has so far been avoided. But with much more impact from higher interest rates, we stand by our forecast that the UK is heading for a mild recession later this year.”

Others said June’s 0.5 percent increase over GDP was likely to be short-lived. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: ‘The UK is entering a more difficult period where, with persistently high inflation, rising interest rates and unusually wet weather, GDP is likely to weaken significantly in the third quarter , despite a boost from lower energy bills.’

Thiru added that while interest rates were likely to rise again next month, further hikes risked “destabilizing an already fragile economy by further stifling consumer spending and business investment.”

Another cloud hanging over the numbers was the fact that the UK remained the only country in the G7 group of advanced economies not to see its GDP return to pre-pandemic levels.