Stronger British economic growth points to rate rise in August, but political uncertainty may deter policymakers

LONDON, July 10 (Xinhua) -- The British economy is returning to modest growth rates after a poor first quarter caused largely by poor weather, signalling good conditions for the Bank of England (BoE) to raise interest rates.

The economy grew by 0.3 percent in May, and 0.2 percent over the three months to the end of May, according to data from the Office of National Statistics (ONS), an improvement on the surprisingly poor growth recorded for the first quarter of 0.1 percent.

"This is the first piece of hard evidence that backs the case for a rate hike," Samuel Tombs, chief UK economist at Pantheon Macroeconomics, a London-based financial research firm, told Xinhua.

Growth was led by services, up 0.4 percent over the three months and retail sales figures were strong, up 0.9 percent over the same period, boosted by the royal wedding and good weather.

Construction was markedly stronger, growing 2.9 percent in May regaining some of the lost ground from the bad weather of the first quarter, but not fully recovering with the sector showing a 1.7 percent decline over the three-month period.

"There are clear signs the economy has recovered from the snow-related disruption in the first quarter and in particular we are seeing strength in the services part of the economy."

Despite a rise on the month, manufacturing output contracted on a three-month basis for the third consecutive month in May, with the sector contracting 1.2 percent over the three months, with export performance behind the drop-off in performance.

Tombs said: "Industry is still lagging behind partly due to temporary factors such as warm weather depressing demands for heating energy and also volatility in the mining sector."

"There is weakness in the manufacturing sector which chimes with weakness across the rest of Europe, and global trade volumes are starting to slide. There are signs that the global trade environment has deteriorated a little and Britain is picking that up."

The improvement in May's figures over the first quarter performance will give members of the BoE's rate-setting Monetary Policy Committee (MPC) encouragement to raise the bank rate by 25 basis points to 0.75 percent, as it pursues a policy of returning rate normalization.

"The services sector is showing signs of strength and that is likely to tip the balance for a rate hike at its next meeting in August," said Tombs.

Higher global oil prices, with the benchmark Brent Crude at 78.8 U.S. dollars on Tuesday, a rise of 67.7 percent over the year, look set to push British Consumer Price Index (CPI) further above the BoE's target rate of 2 percent.

CPI was at 2.3 percent in May, and a rise will further strengthen the argument for the MPC to raise the bank rate.

Tombs said: "Consumers are likely to be hit by a burst of inflation, it is likely to rise to 2.8 percent on the CPI measure in the next couple of months, given that oil prices have picked up."

The National Institute for Economic and Social Research (NIESR), a London-based economic think-tank released its monthly GDP estimates for June on Tuesday, which showed the reinvigorated economic growth strengthening.

Amit Kara, chief British macroeconomist at the NIESR told Xinhua that growth in the three months to the end of June, one month further on than the ONS data, was 0.4 percent, in part because the poor data for the first quarter was dropping out of the figures.

Kara said this was however a clear improvement on the 0.2 percent increase seen in the same series of data for the three months to the end of May, pointing to a return to stronger growth.

For Kara, the signs were clear for a rate rise at the MPC's August meeting, but the uncertainties of Britain's politics might deter policymakers from a rate rise.

British Prime Minister Theresa May unveiled plans for a Brexit on Friday which resulted in the resignation of Brexit Secretary David Davis over the weekend and of Foreign Secretary Boris Johnson on Monday in protest at the change in direction from a more complete Brexit.

Both resignations, along with the resignation of two of May's Conservative party vice-chairmen on Tuesday, increase the pressure on her, with the possibility of a leadership challenge emerging.

Kara said: "I am reasonably confident that the bank will go in August. But the story is the politics. There is a fragile government at the moment and should anything happen that will make it tricky for the MPC to raise rates."

[ Editor: Xxw ]


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