UK GDP up unexpectedly strong 1.1 pct in Q2

[July 23, 2010]  LONDON (AP) -- Britain's economy grew by 1.1 percent in the second quarter, the Office for National Statistics said Friday, surprising markets that had expected more modest expansion.

The jump, which marked the third consecutive quarter of recovery, was attributed mainly to higher output by business services, finance and construction. But, analysts expect the pace of recovery to slow in the second half as the government's cuts in public spending and jobs begin to bite.

GDP is now 1.6 percent higher than at the end of the second quarter of 2009, when the economy was still in recession, the statistics agency said.

The preliminary calculation of the growth rate was above the consensus forecast of 0.6 percent.

"Someone released the hand brake on the UK economy in Q2," said Simon Hayes, analyst at Barclays Capital, who nonetheless was cautious about the course of recovery.

"Consumer and business sentiment have softened recently, reflecting concerns about the effects of government cuts both here and in continental Europe, and demand might well slow in the second half of the year," Hayes said in a research note.

Even though growth was strong, the second quarter rise is not as impressive when compared to the steep decline during the recession, said said Jonathan Loynes, chief European economist at Capital Economics, who noted that activity is still more than 4 percent below the level in the first quarter of 2008.

"With recent business surveys weakening and the fiscal squeeze looming, Q2 looks very likely to be the peak in terms of the pace of growth -- expect a much weaker second half," Loynes said.

The preliminary figure is subject to revision as statisticians work through more data on the economy's performance. In the previous two quarters, the final figure was higher than the preliminary estimate.

Construction, which has been hit hard by a slump in Britain's housing market, increased by 6.6 percent, following two quarters of decline.

Business services and finance were up 1.3 percent, marking the third quarter of growth in that sector.

In a separate report, the British Bankers' Association said the number of mortgages approved for people buying homes fell by 4.4 percent during June, and mortgage lending -- advances minus repayments -- dropped from 2.5 billion pounds ($3.85 billion) in May to 2.1 billion pounds in June.

"This means that British banks have advanced around 2.2 billion of net mortgage in each month of Q2; this is exceptionally weak, when we consider that 2009 saw around 2.9 billion of funds advanced each month," said Varun Bhabha at Barclays Capital.

Net consumer credit declined by 194 million pounds in June, the Bankers' Association said, the 15th consecutive month when consumers repaid loans faster than they borrowed.

[Associated Press; By ROBERT BARR]

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