Shoppers carrying branded shopping bags in London, U.K. (Photographer: Simon Dawson/Bloomberg)

U.K. Economy Set for Best Quarter Since 2016 Despite Flat August

(Bloomberg) -- The U.K. economy appears to be on course for its best calendar quarter in almost two years, despite a weaker-than-expected performance in August.

Gross domestic product grew 0.7 percent in the three months through August, the Office for National Statistics said Wednesday.

In August alone, output was unchanged. Economists had predicted growth of 0.1 percent. However, a similar performance in September would leave growth over the third quarter at 0.6 percent, up from 0.4 percent in the second and the most since the end of 2016.

U.K. Economy Set for Best Quarter Since 2016 Despite Flat August

The figures help to explain why the Bank of England raised interest rates to their highest since 2009 in August. Annual growth in the latest three months was 1.5 percent, around the BOE’s “speed limit.”

The pound was little changed after the data, trading at $1.3154 as of 9:37 a.m. in London.

The economy benefited over the summer from a record heatwave that boosted retail sales and the dominant services industry as well as construction projects, particularly housebuilding. Manufacturing also gained. Overall growth in June and July was revised up by 0.1 percentage point in each month.

In August, the services sector was unchanged -- accommodation and food services posted their biggest decline in a year -- and building output fell 0.7 percent. Industrial production rose 0.2 percent as higher oil, gas and utility output offset a 0.2 percent drop in manufacturing.

Question for BOE

The question for BOE policy makers is the same one they faced earlier this year after snow disruptions saw growth grind to a near standstill in the first quarter. Is the pickup in recent months just weather-related, and therefore temporary, or a sign of underlying momentum that threatens to fuel inflation?

The labor market remains tight and real wages are rising. But with Brexit uncertainty dampening sentiment -- business investment has fallen for two consecutive quarters -- the BOE is not expected to raise rates again before Britain leaves the European Union in March, with or without a deal.

The wider risks to the economy were highlighted this week by the International Monetary Fund, which cut its global growth forecast for the first time in more than two years amid escalating trade tensions and stresses in emerging markets.

Exporters have struggled to take full advantage of the weak pound and now growth is slowing in the euro region, which buys over 40 percent of British shipments.

In August, the trade deficit widened to 11.2 billion pounds ($14.8 billion) as imports increased faster than exports. Still, the shortfall remains on course to narrow in the third quarter from the elevated level posted in the second and contribute to economic growth.

©2018 Bloomberg L.P.