August 24, 2007 / 9:01 AM / 12 years ago

Economy in robust health

LONDON (Reuters) - The economy grew strongly for a sixth straight quarter in the three months to June, data confirmed on Friday, reinforcing the case for one further interest rate hike if turbulent financial markets calm down.

A man poses with British sterling coins in London January 16, 2007. REUTERS/Toby Melville

Sterling surged as the unrevised second reading of GDP growth refocused minds on economic fundamentals, revealing strong consumer spending and price pressures growing at the fastest rate in over a decade.

The Office for National Statistics said the economy grew 0.8 percent on the quarter and 3.0 percent on the year, unrevised and as forecast by analysts.

The implied GDP deflator — a measure of inflation in the economy — picked up to 3.8 percent from 3.2 percent in the first quarter to notch its highest reading since 1996.

“The path of interest rates at the moment depends more heavily on developments in the financial markets,” said Vicky Redwood, an economist at Capital Economics.

“But assuming that the markets continue to calm down, the strength of demand suggests that the case for a further interest rate hike probably still stands.”

That view may gain weight if the economy continues to steam ahead, especially as the Bank of England believes the ONS data is open to upward revision.

INTEREST RATE OUTLOOK

Investors have been preoccupied with worries over the possible fallout from a credit crunch and liquidity crisis in global financial markets in recent weeks, even hoping central banks will cut interest rates to soothe confidence.

But the Bank of England has been conspicuous by its absence as the U.S. Federal Reserve and the European Central Bank injected large amounts of money into the financial system to try and kick start lending.

Before the onslaught of the credit crunch, investors had been convinced the Bank would deliver its sixth rate hike since last August before the end of the year.

With the BoE seemingly unwillingly to join the central bank bail out, the possibility of a rate rise to 6 percent has crept back on to the agenda.

STRONG CONSUMER, WEAK INVESTMENT

Higher borrowing costs do not seem to be putting off the consumer, the second look at the economy’s performance showed.

Increases in household spending were a key driver of growth, picking up to 0.8 percent from 0.5 percent in the first quarter.

But investment growth disappointed, with gross fixed capital formation down 1.1 percent on the quarter after strong rises throughout the last year, raising fears about the stability of an unbalanced economy in current market conditions.

“Consumers were the dominant force, the motor behind UK expansion in the second quarter,” said Lena Komileva, an economist at Tullett Prebon.

“This exposes the economy’s vulnerability over the medium term in a less friendly credit environment.”

The manufacturing sector continued its tentative recovery in the second quarter, with the ONS revising up its contribution to growth to 0.7 percent on the quarter from 0.6 percent.

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