GMP Independent Financial Advisors LLP

Thu, 29 Jul 2010 11:17:58 GMT

Possible questions of plausibility aside, it is difficult to find anything bad to say about the recent GDP figures for the UK. Not only did GDP expand by 1.1% between April and June – double consensus estimates and the country’s largest expansion in four years – it was all in the ‘right’ areas as the private sector made up around 90% of the growth. The construction sector alone accounted for around a third of the growth, with a 6.6% leap in output. Manufacturing also showed strength.

Economists were quick to find reasons why they had miscalculated so significantly – the economy was bouncing back after snow had stalled growth in the winter; new calculation methods were being used; the predicted post-Election spending blues had failed to materialise. And, at the same time came, a number of reasons this all might not be such good news – it couldn’t be sustained in the light of spending cuts; it may have looked like private sector growth but much of it, in fact, germinated in the public sector.

However, taken with the punchy retail sales figures – volumes rose 1% in June – most commentators agreed that the news was a pleasant surprise. That said, in some ways, it shouldn’t have been a surprise at all – the UK has had huge stimulus, low interest rates and the headwind of a weak currency in its favour for some time (it still exports around three times as much to the eurozone as to the US). Until recently this might have been seen as a disadvantage, but the major economies of the eurozone have shown a strength notably absent from recent US figures.

One valid concern is that the news increases the possibility of a rise in interest rates – just as many have grown rather used to cheap borrowing. The recent minutes of the Monetary Policy Committee – issued before the GDP figures were released – showed its focus was again on the threats to growth rather than the threat of inflation. There was even a mention of resuming quantitative easing. It would not be surprising if, armed with this new data, Andrew Sentance – the one dissenter in the pack, who continues to vote for a rise in rates – now finds his views fall on more receptive ears.

It would be surprising if there was any increase in interest rates while it remains unclear what public sector cutbacks will do to the economy, but a few more quarters of growth like this and it will become a real possibility. Every silver lining has a cloud.

for independent financial advice, call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400

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