UK economy 'on the mend' after 0.6% growth, says chancellor

The UK economy is "on the mend" after figures showed it grew by 0.6% in the three months to June, said Chancellor George Osborne.

Output grew in the construction, manufacturing, services and agriculture sectors according to the Office for National Statistics (ONS).

It said the figure meant the economy has recouped more than half the 7.2% of output lost in the 2008-09 recession.

Labour's Ed Balls, said families were still suffering.

Despite the relatively strong figure, analysts said the outlook for the rest of the year remained uncertain.

The 0.6% seasonally-adjusted growth rate was in line with market expectations, and was up from 0.3% growth in the previous quarter.

"This isn't a figure that should be shouted from the rooftops by any means," said Richard Driver, currency market analyst at Caxton FX. "But given where we have been and where most other global economies are now in terms of economic growth, it is more than satisfactory.

"The challenge now is to maintain this pace of growth in the second half of the year and the prospects look highly uncertain in this regard.''

It is the first estimate for growth during the second quarter of 2013, and is based on about 44% of actual data on economic activity.

"These figures are better than forecast," said Mr Osborne. "Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend - but there is still a long way to go and I know things are still tough for families."

Shadow chancellor Ed Balls welcomed the growth figure "after three wasted and damaging years of flat-lining", but warned that "families on middle and low incomes are still not seeing any recovery in their living standards" because wage rises were failing to keep up with increases in prices.

Broad-based recovery

The latest growth estimate implies that the economy has now recouped almost half of its total 7.2% contraction during the 2008-09 recession, with output remaining 3.3% below its pre-recession peak.

The growth figure reflects the seasonally-adjusted increase in output in the second quarter of the year, compared with the first quarter. Compared with the second quarter of 2012, gross domestic product grew by 1.4%.

The recovery was unusually broad-based, with the agriculture and production sectors both turning in positive growth, alongside services and construction.

The services sector grew 0.6% in the three-month period, compared with the previous quarter, and was just 0.2% below the peak level it recorded in early 2008.

The sector is the largest component of the UK economy - constituting about 80% of output - and made the largest contribution to the overall growth figure.

Within services, business was particularly strong in the hotels, restaurants and distribution according to the ONS, expanding 1.5% in the quarter, on top of 1.2% growth in the first three months of the year.

While both the construction and manufacturing sectors bounced back in the latest quarter, they both remain far below their levels back in 2008 before the recession.

"It's very striking that construction and manufacturing, not only are they still well below where they were, they really did have a double-dip," said the BBC's economics editor Stephanie Flanders.

"The crucial thing, the thing that we really hope is not here for good, is the lack of investment. Companies are sitting on a lot of money, maybe 6% or 7% of GDP… they're not investing, they're sitting on the sidelines."

Construction experienced a second sharp slump in early 2012, while manufacturing - which had experienced a modest rebound up until late 2010 - has steadily declined in almost every quarter since then, in large part due to weak demand from the crisis-struck eurozone.

"For manufacturing, this should signal the start of a gradual improvement in output and orders books through the rest of this year," said Lee Hopley, chief economist at the manufacturers trade body, EEF.

"Indeed better news on eurozone activity this week gives further cause for a bit of optimism for manufacturers and exporters but, importantly, we need to see output growth followed by a turnaround in business investment in the coming quarters."

Low interest rates

The growth figure was in line with market expectations, and share prices on the London Stock Exchange did not react to the news.

However, the pound did drop just under half a cent against the dollar to $1.533, indicating that some market participants believed the data may support further monetary intervention by the Bank of England.

The Bank is next due to discuss monetary policy on 1 August.

Of potentially greater significance will be the publication of the next inflation report on 7 August, which is when the Bank has said it will begin issuing "forward guidance" - a soft commitment as to how long it will keep interest rates at their current historic low of 0.5%.

"With risks still pervading there is enough in this release to keep more dovish MPC members pushing for more to stimulate the economy," said David Tinsley, UK economist at BNP Paribas.