Britain's economy bounces back, despite currency hit to exporters

Tue Jul 28, 2015 9:53am EDT
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By David Milliken and William Schomberg

LONDON (Reuters) - British economic growth got back on track in the second quarter but the strength of the pound hurt manufacturers, putting the Bank of England in a tricky spot as it gets closer to raising interest rates.

The economy grew by 0.7 percent in the three months to June, the Office for National Statistics said on Tuesday, in line with forecasts and above the long-run average. It followed an unexpected slowdown to 0.4 percent in the first three months of 2015.

But the figures showed an increased reliance on domestic demand, with business and financial services powering ahead, while factory output suffered a rare quarterly fall.

"Sterling strength has clearly been a key driver behind the re-emergence of the two-speed economy, making life more difficult for export-focused UK manufacturers," Investec economist Victoria Clarke said.

Oil and gas output had one of its biggest leaps in a generation, after a tax cut for the sector in March.

Sterling rose almost a cent against the dollar GBP= as traders bet that the data kept the BoE on track for a rate rise early next year.

Last year Britain recorded its fastest growth in eight years and BoE Governor Mark Carney said this month that the decision on when to raise interest rates from their record low 0.5 percent would come into focus around the end of the year.

Economists expect a minority of policymakers to vote to raise rates as soon as next week's BoE meeting, encouraged by signs of stronger wage growth and an economy close to full capacity.   Continued...

A woman looks towards the City of London financial district from Parliament Hill in north London March 31, 2015. REUTERS/Toby Melville