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UK GDP growth picks-up to 0.3% in May, backing case for August rate hike

By Alexander Bueso

Date: Tuesday 10 Jul 2018

UK GDP growth picks-up to 0.3% in May, backing case for August rate hike

(Sharecast News) - Britain's economy accelerated in May, driven by a surge in construction output, after flat-lining in April, leaving the MPC on track to hike Bank Rate come August, according to some economists.
According to the Office for National Statistics, the UK's gross domestic product expanded at a month-on-month pace of 0.3%, which was a tenth of a percentage point higher than in the month before.

A 2.9% jump in construction output was the chief driver behind the gains, following a drop of 1.8% in March and a flat reading for April.

Services output on the other hand eased a tad from the rate of growth of 0.4% seen in April, slipping to 0.3%, with industrial production shrinking by 0.4% even after a drop of 1.0% in the month before.

In terms of quarterly rates of change, ONS said gross domestic product grew by 0.2% over the three months to May, the same pace as seen over the first three months of the year.

Nevertheless, that did mark an improvement from no growth seen over the three month to April.

Services output fared best, helped by warm weather and the royal wedding, expanding by 0.4%, but was offset by a 1.2% drop in factory production - drive by weak exports - and a 1.7% decline in construction output.

Agricultural output meanwhile was flat.

Within services, wholesale and retail trade jumped by 0.9% over the quarter, adding 0.1 percentage points to the quarterly rate of change in GDP, ONS added.

The decline in factory output on the other hand subtracted 0.12 points from quarterly GDP and that in construction 0.1 points.

Tuesday's figures marked the inaugural release of rolling monthly estimates of GDP by ONS.

Commenting on the figures, Andrew Wishart at Capital Economics highlighted the month-on-month increase seen in factory output in May, which he took as a sign of the start of a recovery in manufacturing.

He also noted that another reading of 0.3% for monthly in GDP for June would put the quarterly rate of growth at 0.4%, in-line with the latest set of forecasts from the Monetary Policy Committee.

Given the strong set of PMI surveys in June, this seems likely," Wishart added.

"As a result, we think that the figures keep the Committee on track to lift Bank Rate in August."

Samuel Tombs at Pantheon Macroeconomics concurred, telling clients: "The upturn in the new monthly measure of GDP in May is just strong enough to tip the balance in favour of the MPC likely raising Bank Rate at its next meeting on August 2, provided the government doesn't implode before then."

Nevertheless, Tombs added that a relapse in activity levels in the back half of 2018 would see the MPC defer the next rate hike after August until nine months afterwards.

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