UK economy recovers output lost to crisis, grows +0.8 percent in second quarter

[July 25, 2014]  LONDON, (Reuters) - Britain’s economy is finally bigger than it was before the financial crisis struck six years ago, official data showed on Friday.

Gross domestic product expanded by 0.8 percent in the April-June period, the same strong pace as in the first three months of the year and in line with forecasts in a Reuters poll of economists.

Compared with the second quarter of last year, growth was 3.1 percent, the fastest pace since the end of 2007, the Office for National Statistics said.

That meant total economic output was 0.2 percent bigger than in the first quarter of 2008, its previous peak.

Britain’s economy largely flat-lined after a 2008-09 recession. But it sprang back to life last year and is set to be the fastest-growing country in the Group of Seven rich nations this year, according to the International Monetary Fund.

The pace of the recovery has put the Bank of England on alert that it may have to raise interest rates this year although its policymakers expect a slight slowing in the second half of 2014 and are focusing increasingly on low pay growth.

The ONS said on Friday that the country’s dominant services sector again led the way, expanding by 1.0 percent in the second quarter from the previous three months, the fastest quarterly growth since the third quarter of 2012.

In a reminder of the challenge of getting the economy onto a sustainable footing over the long term, manufacturing edged up just 0.2 percent between April and June, its weakest growth rate in more than a year.

Construction shrank by 0.5 percent, the first time the sector has not grown since the start of 2013. Building had a very weak month in May and an ONS official said construction was expected to show growth again in June.

Only the services industry - which accounts for about 80 percent of Britain's economy - is now bigger than before the crisis, at nearly 3 percent above its previous peak. Industrial output and construction are both still more than 10 percent smaller.

While economists had predicted overall economic growth would come in at 0.8 percent in the second quarter, some had seen a risk of it being weaker after disappointing industrial output and construction data during the period.

The government, facing national elections in 10 months’ time, is unlikely to draw much attention to the economy getting back to its pre-recession size.

Other countries recovered the output lost to the crisis much earlier than Britain. Germany passed that milestone in 2010 and France and the United States followed the next year.

GDP per person is only expected to return to pre-crisis levels in 2017, reflecting growth in the population and the country's stubbornly weak productivity since 2008, according to Britain’s independent budget forecasters.

The slow pace of Britain's recovery from the crisis is partly because of the size of its banking sector, which took a huge hit in the financial crisis.

But critics of the government say it is also because finance minister George Osborne opted for sharp curbs on public spending to rein in the country’s large budget deficit.

The ONS's preliminary estimates of GDP do not include a breakdown of spending. They are the first released in the European Union, and are based partly on estimated data.

Changes to the way the ONS calculates GDP, which will be introduced later this year, are expected to show that the British economy passed its pre-crisis peak earlier than in the second quarter of 2014.

(Reporting by William Schomberg and Andy Bruce)

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