British Economy Making Comeback but Challenges Loom

British GDP shot up 0.7 percent in the second quarter, improving upon 0.4-percent growth seen in the first quarter. Factory output faltered during the second quarter, and a stronger currency is hurting the export sector.

Data from the Office for National Statistics further showed that Britain is increasingly relying on domestic demand to sustain the economy. Analysts also expect domestic demand to remain strong, as wage increases allow more people to pour money into the economy. Inflation is also down, and more firms show a willingness to invest again.

British GDP shot up 0.7 percent in the second quarter, improving upon 0.4-percent growth seen in the first quarter. Factory output faltered during the second quarter, and a stronger currency is hurting the export sector.

Data from the Office for National Statistics further showed that Britain is increasingly relying on domestic demand to sustain the economy. Analysts also expect domestic demand to remain strong, as wage increases allow more people to pour money into the economy. Inflation is also down, and more firms show a willingness to invest again.

The business and financial sectors continue to propel Britain forward, but the service sector is driving the most growth. The service output sector, which makes up over three quarters of the economy, grew at 0.7 percent in the second quarter. This is a vast improvement when compared to the first quarter, when output stood at 0.4 percent, and economy output increased by 2.6 percent. In addition, the oil and gas sector achieved its largest growth rate since the late 1980s, stemming from March tax cuts bestowed on the industry. The cuts allowed the energy sector to boost industrial total output by 1.0 percent, which is Britain’s largest boost in five years.

However, factory output fell 0.3 percent, and lagging exports remains an issue. Stronger currency aside, the export/output decline has to do with other factors, such as weaker demand from Eurozone economies, including the world economy as a whole. The export economy is just one of many factors that the Bank of England is examining when considering the right time to raise interest rates, but a decision may come at the end of the 2015.

Banking officials are weighing the impact of rate increases on the recovery, and bankers are concerned that changes could prevent additional growth. The BOE is also factoring in wage growth, with total pay increasing 3.2 percent, but total pay is 3.3 percent less than what analysts were expecting, notes Bloomberg. In total, private sector pay reached an annualized 3.8 percent.

The wage increase is at its fastest rate in five years, but unemployment rose to 5.6 percent, the largest surge since the fourth quarter of 2013. The mixed data further complicates the bank’s decision to raise rates, and analyst opinions differ on when the bank will raise rates. What is certain is that Britain has some work to do in fostering greater wage increases and improving the nation’s manufacturing base.