Unexpected growth in UK economy heightens pressure to hike interest rates

The growth in the UK economy was largely driven by a robust expansion from the services and manufacturing industries

THE UK economy unexpectedly rebounded in the third quarter, upping the pressure on the Bank of England to hike interest rates next month.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.4 per cent in its initial estimate for July to September this year.

The rise is above expectations of 0.3 per cent, as economists predicted growth in line with the first and second quarters of 2017.

It was largely driven by a robust expansion from the services and manufacturing industries, which countered a dismal display from the construction sector.

However, the UK economy is still struggling to bounce back to levels seen in the final quarter of 2016 when GDP rose by 0.7 per cent.

It comes as the Bank's Monetary Policy Committee (MPC) mulls whether to raise interest rates from record lows of 0.25 per cent in November, as inflation continues to soar.

Howard Archer, EY ITEM Club's chief economic adviser said he expects interest rates to rise next month.

"Improved third-quarter GDP growth of 0.4% quarter-on-quarter increases the chances that the Bank of England will raise interest rates from 0.25% to 0.5% on November 2 after the MPC meeting."

Darren Morgan, the ONS head of national accounts, said services, led by increases in IT, motor trades and retail, continued to drive GDP growth.

"Manufacturing also boosted the economy with an improved performance after a weak second quarter.

"However, construction output fell for the second consecutive quarter, although it remains above its pre-downturn peak."

The UK's services sector, which accounts for around 79 per cent of economic growth, grew by 0.4 per cent in line with the quarter before.

The main drivers came from the business services and finance sector, which climbed by 0.6 per cent for the period.

Industrial production also rose by 1 per cent during the third quarter, boosted by a 1% jump from manufacturing and a 1.5% rise from mining and quarrying.

It helped to counter a lacklustre performance from the construction sector, which fell by 0.7 per cent between July and September - the lowest drop since the third quarter of 2012.

Danske Bank economist Conor Lambe said despite the upturn in the economy it was not all positive news.

"Real GDP growth in the UK remains a bit below its historic average as the economy continues to feel the effects of a squeeze on consumers and heightened uncertainty levels due to Brexit. Both of these factors are expected to continue weighing down on growth over the rest of this year and into 2018.”

A separate measure of the services sector - the index of services - showed output growth of 0.2 per cent between July and August this year, the ONS said.

On an annual basis, GDP expanded by 1.5 per cent in the third quarter, compared to the same three months in 2016.

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