By Jon Sindreu And Jason Douglas
LONDON--The British economy stepped up a gear in the second
quarter, lifting growth prospects during the rest of the year but
raising questions about how much longer the Bank of England can
keep interest rates pegged at record lows.
The U.K. Office for National Statistics said Tuesday gross
domestic product expanded 0.7% between April and June, an
annualized rate of 2.8%. The figures are just a preliminary
estimate, but they spell out that the economy has recovered from a
slight slump in the first quarter--when quarterly growth was
0.4%--and is ready to gather pace during the remainder of the
year.
Britain's pickup was driven by its powerhouse services sector,
official data showed, which disappointed in the first quarter but
now looks set to benefit from higher earnings and low
inflation.
The industrial sector also posted a strong recovery, as the
extraction industry in the North Sea came back to life after months
of ultralow oil prices. Mining and quarrying activity picked up at
the fastest pace in more than 25 years, the ONS said, aided by tax
cuts for oil and gas producers set in March.
An increasingly buoyant economy could lead the Bank of England
to bring forward its planned tightening of monetary policy. The
BOE's policy interest rate has remained unchanged at a record-low
0.5% for more than six years, but officials have recently signaled
the time to raise it--to keep medium-term inflation under
control--is growing nearer.
Investors currently expect the U.K.'s central bank to nudge up
interest rates early next year.
However, other indicators could muffle hawkish voices among BOE
rate-setters, as official figures recently showed a small uptick in
unemployment. In combination with strong GDP figures, this suggests
the economy is being fueled by productivity gains instead of more
people going into work. Labor productivity, which is the amount of
output each worker produces in an hour, is a key gauge of economic
health.
"A revival in productivity will help the recovery to achieve an
above-trend pace over the coming quarters. What's more, this
revival should help to keep inflation subdued," said Samuel Tombs,
analyst at Capital Economics.
Stronger productivity would allow the Bank of England to keep
monetary policy loose for longer, further boosting economic growth,
because it would mean pay rises are translated into more goods and
services being produced every hour--instead of prices going up.
Nevertheless, Tuesday's GDP figures also confirmed some of the
ills that have affected the U.K. economy for a while.
Manufacturers, which are having a challenging 2015, posted a slight
fall in production during the second quarter. Recent surveys
indicate factories continue to grapple with weak exports into the
third quarter, hampered by the strength of the pound relative to
other major currencies.
Official figures also showed construction output remained flat,
although the ONS notes data for the sector is generally unreliable
and prone to large revisions
Write to Jon Sindreu at jon.sindreu@wsj.com and Jason Douglas at
jason.douglas@wsj.com