July 22, 2010 / 1:47 PM / 10 years ago

UK Q2 economic growth seen at fastest in 3 years

LONDON (Reuters) - Britain, the first G7 country to report Q2 GDP, likely recorded its fastest quarterly growth in three years between April and June, boosted by firms rebuilding their stocks as confidence slowly returns after an 18-month recession.

The financial district is seen in a view across the River Thames in London, June 22, 2010. REUTERS/Paul Hackett

Much of the acceleration is likely to come from a rebound in industrial output, which accounts for around 17 percent of economic output, and which analysts estimate expanded by around 1.2 percent in the second quarter after 1 percent growth in Q1.

“The economy is currently benefiting from a turn in the inventory cycle, which while typical of this stage of the recovery, should be temporary,” said Philip Shaw, economist at Investec.

The services sector, which makes up around three-quarters of economic output, is also likely to have turned in a robust performance in the second quarter, despite a setback in April due to disruption caused by Iceland’s volcanic ash cloud.

Services output expanded by 0.3 percent in the first three months of this year and analysts say recent Markit/CIPS purchasing managers surveys point to a modest improvement in Q2.

But the prospects for the rest of this year remain uncertain. Deep government spending cuts at home and abroad risk denting confidence and curtailing demand in the remainder of 2010.

“There is a very real risk that the second quarter will be as good as it gets for the economy for the time being,” said Howard Archer, economist at IHS Global Insight.

“Going forward, we expect growth to be relatively muted and bumpy in the face of serious headwinds, including major fiscal tightening increasingly starting to impact, the euro zone’s problems and pressure on consumers coming from high unemployment, muted wage growth and high debt levels.”

MARKET REACTION

A stronger than expected reading will support the pound, adding to positive momentum generated from Thursday’s upbeat retail sales data.

Benchmark gilt yields are likely to rise further from recent 14-month lows, although economists will be aware that second quarter figures are now backward-looking.

Reporting by Fiona Shaikh; editing by Patrick Graham

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