Time for a recap.

Fears that the UK economy could drop into recession are still swirling, despite better-than-expected GDP data released this morning.

The UK economy picked up pace in the second quarter of this year, with GDP rising by 0.2% – beating expectations that it would stagnate.

Growth was particularly pacey in June, with GDP rising by 0.5% thanks to stronger manufacturing and construction work. There were also more working days compared to May, when the UK downed tools for the coronation.

Rishi Sunak said the GDP report was good news, adding:

At the beginning of the year I made growing the economy one of my top priorities, and we are making progress.

“There’s still more work to do, but today’s figures show the plan is working.

However, both the CEBR and Capital Economics have warned today that the UK could fall into recession in the coming quarters, as high interest rates hit growth.

Craig Erlam, senior market analyst at OANDA, says better weather in June helped the the UK economy showed further resilience toward the end of the second quarter.

The cost-of-living crisis has clearly been an immense drag on the economy and due to its nature, will have hit some households much harder than others. But overall, consumer activity has been very resilient which has ultimately stopped the economy from falling into recession, an outcome that now looks increasingly unlikely.

The economy grew 0.5% in June from a month earlier, much stronger than anticipated and contributing to 0.2% quarterly growth. That’s nothing to write home about, of course, and the economy still faces enormous challenges and pressures, but inflation falling below average earnings growth could enable that spending resilience to continue.

City investors worried that the stronger growth could encourage the Bank of England to keep raising interest rates. This hit share prices in London, where the FTSE 100 index has closed down 94 points or 1.25% at 7524.

However, Resolution Foundation pointed out that the UK economy had recorded its weakest growth in 65 years outside a recession, in recent quarters….

… while still lagging other countries for post-Covid 19 recovery:

Here’s the full story:

And here’s the rest of the business news:

Some happy news to end the week: England’s wine producers are predicting bumper harvests after perfect weather this year.

Growers are expecting the highest and best yields to date, boosting the burgeoning wine industry in the UK. There are now 943 vineyards across Great Britain, according to a new report from the trade group WineGB. The industry produced 12.2m bottles in 2022, a large rise on the 5.3m bottles in 2017.

Additionally, exports are up from 4% to 7% and it is predicted production will reach 25m bottles by 2032, with 7,600 hectares (18,800 acres) of vines planted. At present there are 4,000 hectares (9,900 acres).

Augusta Raimes, a partner at Raimes English Sparkling, near Alresford, in Hampshire, said temperatures were just right, bringing back memories of 2018, which was a “phenomenal year” for growers. She said:

“We have very nice, clean fruit and big bunches. It’s very exciting.”

The Co-operative Bank has clinched a deal to buy Sainsbury’s Bank’s £479m mortgage book for an undisclosed sum.

It marks Saisbury’s formal exit from the mortgage market, with the supermarket’s bank having closed to new home loan deals back in 2019.

Sainsbury’s Bank CEO Jim Brown said the deal marked a “big step in simplifying our business.”

The purchase is also a boon for the hedge fund-owned Co-op Bank, which had a separate £1bn bid for high street rival TSB rebuffed by its Spanish owners, Sabadell, in 2021. It is also the bank’s first portfolio acquisition in more than a decade.

The deal ends months of negotiations, with the hedge fund-owned Co-op Bank having reportedly been in the running for the portfolio sale as early as February.

The new owner said it was planning to transfer Sainsbury’s Bank’s 3,500 mortgage customers to its own business over a one year period “to ensure a smooth process”.

As well as boosting its customer base, the portfolio will likely be lucrative for Coop Bank, as rising interest rates allow banks to charge more for home loans - boosting their bottom line.

Nick Slape, CEO of The Co-op Bank said:

“This transaction, our first portfolio acquisition in more than a decade, further demonstrates the progress we have made in recent years and our strength in what remains a competitive UK mortgage market.”

The CEBR thinktank predict the UK economy will decelerate this year, and fall into recession.

Not what Rishi Sunak will be hoping for ahead of the general election.

But Sam Miley, managing economist at the CEBR warns that higher interest rates will hit growth

“Though GDP picked up in Q2, it should be noted that growth remains poor by historic standards. The future outlook is also weak, with the economy continuing to face several headwinds, notably the impact of tighter monetary policy.

Cebr expects quarterly growth to decelerate in Q3. Contractions are then projected for the subsequent two quarters, marking a technical recession.”

This would also be a blow to efforts to catch up with other G7 nations:

The UK economy remains in “a precarious place” despite beating expectations in the last quarter, warned David Bharier, head of research at the British Chambers of Commerce, this morning.

Businesses are continuing to face a worrying mix of high inflation, rising interest rates, a tight labour market, and global economic uncertainty.

While the UK remains on course to avoid a technical recession, small movements in one direction or the another won’t mean much for many firms facing the toughest trading conditions in years, Bharier pointed out, adding:

“Our latest Quarterly Economic Survey shows that most SMEs continue to report no improvement to investment, cash flow, or sales. Worryingly, 41% of businesses are now concerned about the impact of rising interest rates.

“UK businesses are very adaptable, but they are looking for clear direction from the government and the Bank of England, particularly on interest rate policy and a long-term plan to unlock investment.

Analysts at Berenberg Bank are encouraged that UK business investment rose in the last quarter, by 3.4%, as this chart shows:

This has ben a long-running problem for the economy – but they believe a “business investment boom” is now underway:

Holger Schmieding, Berenberg’s chief economist, explains:

Productivity-enhancing business investment stalled badly after the UK voted to leave the EU, and then collapsed during the first wave of COVID-19 in early 2020. The weakness in investment has hurt productivity, harmed supply potential and contributed to inflation pressures.

However, the latest data indicate that the post-COVID snapback in investment may be turning into a genuine investment boom. Business investment has surged by 35% from the Q2 2020 low and is now 6% above its pre-Brexit-vote high.

Despite a rising cost of capital, cash balances worth c25% of GDP and corporate debt-to-GDP at a 25-year low provide businesses with ample space to raise investment spending, while rising labour costs and pricing power in final markets provide an incentive to do so. Fading political uncertainty, combined with economic recovery, can underpin further strong investment gains.

In the banking world, UBS has terminated a 9bn Swiss franc (£8bn) government lifeline, and repaid billions of pounds worth of loans to the Swiss central bank, as part of efforts to rid itself of taxpayer support following its emergency rescue of rival Credit Suisse in March.

The lender said it had completed a “comprehensive assessment” and “severe” stress test of Credit Suisse assets, which showed it did not need the £8bn loss protection agreement (LPA).

The deal would have seen taxpayers absorb losses beyond the first 5bn Swiss francs, which UBS would have to take on.

UBS said:

“At the time, this was deemed necessary to protect UBS against potential tail risks as there had been very limited time to review respective assets over the rescue weekend. After reviewing all assets covered by the LPA since the closing in June and taking the appropriate fair value adjustments, UBS has concluded that the LPA is no longer required.”

UBS also announced today that it had turned down a 100bn Swiss franc (£89bn) liquidity lifeline from the Swiss National Bank, and that Credit Suisse has paid back 50bn Swiss francs worth of emergency funding to the central bank, bringing an end to the deal’s controversial state support.

Swiss authorities orchestrated UBS’ takeover of Credit Suisse in March, in order to stem a crisis of confidence in the global banking sector that led to the collapse of three US lenders. The merger drew criticism, including from Credit Suisse shareholders, who called for board members to be “put behind bars” following the bank’s failure.

UBS is expected to reveal more details about the progress of the merger on 31 August when it releases its Q2 results.

Reuters has seen an internal memo to UBS staff, saying:

“It should be clear to all of us that we still have a lot of work ahead of us to realize the full potential value from this transaction.”

The good news on UK growth this morning is going down a little badly in the City.

The blue-chip share index, the FTSE 100, has dropped by 1% or 76 points to 7542 points.

Investors appear concerned that the better-than-expected GDP figures could encourage the Bank of England to keep raising interest rates.

John Choong, equity and markets analyst at investing comparison platform, InvestingReviews.co.uk, explains:

“The FTSE 100 opened in the red this morning as markets were spooked by strong services data in the GDP figures. This may spur more rate hikes than markets expected, with the Bank of England handed more room to do so without triggering a recession given the economy’s strength.

As such, housebuilder stocks, which are sensitive to interest rate futures, are on the decline again with gilt yields taking a jump.

AJ Bell investment director Russ Mould says:

“Before we roll out the garlands it is worth observing the UK remains one of the few major economies to reach its pre-pandemic size. This is a story of resilience rather than dynamism.

The durability of the economy is a double-edged sword as it may lead the Bank of England to keep taking a hard line on interest rates. Given the lagged impact of rate increases, which have already seen borrowing costs increase from near zero to more than 5% in a little over 18 months, this could result in a more significant downturn at some point down the line.

“On the other hand, a lower than anticipated inflation number next week could build confidence in a Goldilocks scenario where the economy is blowing neither too hot or too cold and the Bank can start to dial back the pressure on rates and avoid inflicting much more pain without risking losing control of prices again.”

European stock markets are also in the red, with Germany’s DAX and Italy’s FTSE MIB both down 0.5%.

Data from China, showing the new loans plunged to their lowest since 2009, have added to concerns over the world’s second-largest economy.

Rishi Sunak has claimed the government’s plan was working, after this morning’s GDP figures showed the UK economy grew by 0.2% in the second quarter of the year.

Sunak said:

This is good news. At the beginning of the year I made growing the economy one of my top priorities, and we are making progress.

“There’s still more work to do, but today’s figures show the plan is working.”

The PM will obviously be relieved that the downturn that was feared last winter has been avoided, although some economists do predict the economy could still drop into a recession (see earlier post).

Also, quarterly growth of 0.2% is still weak in historic terms. Over 1980 to 2014, for example, real GDP growth averaged 2.2% per year.

Capital Economics, the City consultancy, are sticking with their forecast that the UK is heading for a mild recession later this year.

Ruth Gregory, their deputy chief UK economist, told clients that the 0.5% rise in GDP in June was mostly due to the return to the normal number of working days in June after May’s bank holiday for the King’s Coronation.

Thus, it makes the economy look stronger than it really is.

Gregory added:

Overall, the bank holiday, unusually warm weather and strikes make it hard to judge the true health of the economy. But our sense is that underlying activity is still growing, albeit at a snail’s pace. We still think that with most of the drag from higher interest rates still to come, GDP will fall in Q3 and a mild recession will begin.

That may not prevent the Bank from raising interest rates from 5.25% now to 5.50% in September. But it may mean that rates don’t rise as far as the 5.75-6.00% envisaged by the consensus and investors.

The UK economy grew faster than expected in the second quarter of this year after growth was boosted by a recovery in car manufacturing and a surprisingly strong June.

UK GDP increased by 0.2% in April to June, up from 0.1% in the previous three months and the best quarterly reading in more than a year, according to the Office for National Statistics (ONS).

The data surprised economists, with a poll of them beforehand forecasting no growth in output during the quarter. The reading was helped by an unexpectedly strong performance in June, when output rose by 0.5%. GDP had fallen by 0.1% in May because of an extra bank holiday to celebrate the coronation of King Charles after growth of 0.2% in April.

However, the UK economy still remains 0.2% smaller than it was in the final quarter of 2019, before the onset of the coronavirus pandemic triggered the deepest recession on record.

The cost of living crisis period of the last 18 months remains the weakest period outside a recession for 65 years, the Resolution Foundation thinktank pointed out, despite the UK economy dodging a technical recession of two consecutive quarters of declining GDP.

Darren Morgan, an ONS director of economic statistics, said:

“The economy bounced back from the effects of May’s extra bank holiday to record strong growth in June. Manufacturing saw a particularly strong month, with both cars and the often-erratic pharmaceutical industry seeing particularly buoyant growth.

“Services also had a strong month, with publishing and car sales and legal services all doing well, though this was partially offset by falls in health, which was hit by further strike action. Construction also grew strongly, as did pubs and restaurants, with both aided by the hot weather.”

You can read more here:

Just in: We have some relief for mortgage holders this morning.

Average rates on two and five-year fixed rate mortages have dropped today, according to data provider Moneyfacts.

It says:

The average 2-year fixed residential mortgage rate today is 6.80%. This is down from an average rate of 6.83% on the previous working day.

The average 5-year fixed residential mortgage rate today is 6.28%. This is down from an average rate of 6.33% on the previous working day.

Several lenders have announced cuts to their mortgage rates this week, including Halifax, Nationwide, TSB, NatWest and Virgin Money.

Lower rates would help the economy, as it would cushion the impact of the ‘mortgage timebomb’ facing those households whose existing fixed-rate deals are expiring.

The UK economy is still outperforming expectations, says Thomas Pugh, economist at audit, tax and consulting firm RSM UK.

The growth of 0.2% recorded in the last quarter is “a far cry” from the significant recession that seemed likely at the start of this year, Pugh points out, adding:

‘Strong economic growth in June was much more than just a bounce back from the extra bank holiday in May. Underlying growth rose rapidly suggesting that the economy is coping relatively well with the surge in interest rates and ongoing cost-of living-crisis.

‘While this is good news for the economy, a stronger economy points to inflation falling more slowly than it otherwise might have done. However, there are two reasons not to think interest rates need to go higher than the 5.5% - 5.75% peak already priced in. First, in its latest forecast the MPC had already forecast relatively punchy growth of 0.4% q/q in Q3, even factoring in the recent strength we doubt the economy will breach this. Second, the US economy’s recent experience proves that inflation can fall rapidly without a recession, or even a sharp reduction in growth. As such, we still think a peak of 5.5% or 5.75% looks right.

Pugh adds that growth is likely to fall back in 2024 as the impact from the rise in interest rates continues to grow, saying:

We think the economy will avoid a recession, but only just.’

The UK lagged behind the US and France in the second quarter of this year, but beat Germany and Italy.

Not all G7 countries have reported Q2 GDP data yet, but we do know that:

• US: grew by 0.6% in the second quarter of 2023

• France: grew by 0.5%

• Germany: stagnation, with 0% growth

• Italy: contracted by 0.3%

The eurozone economy grew faster than the UK, with eurozone GDP expanding by 0.3% in April-June. But the wider European Union stagnated in the second quarter.

Treasury minister John Glen argues that today’s growth figures show there was “a lot of resilience” in the UK economy.

Speaking on Radio 4’s Today programme, Glen defends the UK’s 0.2% growth in April-June.

If you look at what’s happening in Germany where it’s flat, and Italy where it’s minus 0.3, it’s not easy across the whole of the world economy at the moment.

The combined effects of what happened with Russia and Ukraine, supply chains, the legacy of Covid, that can’t be fixed in one lever from the Treasury.

Although UK GDP was stronger than expected in the April-June quarter, over the past 18 months growth has been the weakest for 65 years outside of a recession, says the Resolution Foundation.

So while the economy is not in recession, “the reality” is that it continues to stall, they say.

High inflation and rapid increases in interest rates meaning that this period will feel like a recession in all but name to many, Resolution warns.

James Smith, research director at the Resolution Foundation, says:

“The good news is that the economy grew by 0.2% in Q2, stronger than the flat growth many had expected. This is a continuation of the UK’s relative resilience as we continue to dodge the technical recession experienced elsewhere in the face of the ongoing cost of living crisis.

“But the big picture is that the UK economy has expanded by just 0.4% since the start of 2022 – the weakest growth in 65 years outside of a full-blown recession.

“With the economy continuing to stall, we are far from out of the cost of living crisis woods yet. Such weak growth will feel like a recession to many as families struggle with the ever-rising cost of essentials and higher mortgage repayments.”

[updated at 8.30am]

The Great British consumer is proving remarkably resilient and is helping the economy avoid falling into recession, for now at least.

That’s the verdict from Ed Monk, associate director for Personal Investing at Fidelity International:

Growth in the second quarter of 0.2% was slightly above expectations, thanks to household expenditure that jumped between April and June - no mean feat on the face of the cost-of-living crisis we’ve seen.

“The tight labour market helped to support consumer spending with wages rising strongly, albeit below the rate of inflation. Government support though the Energy Price Guarantee and an inflation-matching rise in the State Pension has also softened the blow for households, and it may also be possible that excess saving during the pandemic has allowed spending to be maintained.

“The UK economic glass is either half-full or half empty, depending on your point of view, Monk adds:

For the optimists, the Britain has avoided recession while wage growth and the labour market have been resilient. For the pessimists, growth is still weak with UK GDP below its level from before the pandemic and lagging other major economies.

“Conditions are likely to get worse from here as higher interest rates take full effect, wages slow and the jobs market weakens. These things may be necessary in the fight against persistent inflation but it means there’s more uncertainty to come for households.”

Chancellor of the Exchequer Jeremy Hunt has welcomed the news that the UK economy grew by 0.2% in April-June, saying:

“The actions we’re taking to fight inflation are starting to take effect, which means we’re laying the strong foundations needed to grow the economy.

“The Bank of England are now forecasting that we will avoid recession, and if we stick to our plan to help people into work and boost business investment, the IMF (International Monetary Fund) have said over the longer-term we will grow faster than Germany, France and Italy.”

The pound has strengthened, jumping almost half a cent to $1.272 against the US dollar.

June’s stronger-than-expected growth feels like “the first positive surprise in a long run of economic plot twists”, says Joseph Calnan, corporate FX dealing manager at Moneycorp:

Calnan explains:

However, both GDP and inflation are still off where they need to be, with the Bank of England and government policymakers clearly struggling to deliver on their respective remits.

“The thornier question is what this will mean for interest rates. What the BoE has been looking for in its relentless campaign of back-to-back interest rate hikes is a meaningful slowdown in the economy, and this doesn’t hit that brief.

“Despite the backdrop of spiralling wage growth and a hot labour market; it’s possible the 25 bps rate rise forecast at the next MPC meeting will remain. But, as the past few months have shown us, you can never be sure which way the next set of economic indicators will go.”

ONS director of economic statistics Darren Morgan says there was “particularly buoyant growth” in the UK’s car-making sector in June, and also in the pharma sector:

“The economy bounced back from the effects of May’s extra bank holiday to record strong growth in June. Manufacturing saw a particularly strong month with both cars and the often-erratic pharmaceutical industry seeing particularly buoyant growth.

“Services also had a strong month with publishing and car sales and legal services all doing well, though this was partially offset by falls in health, which was hit by further strike action.

“Construction also grew strongly, as did pubs and restaurants, with both aided by the hot weather.”

Newsflash: The UK economy has posted modest growth in the second quarter of this year, defy fears of stagnation.

UK GDP expanded by 0.2% in April-June, the Office for National Statistics reports, beating forecasts of no growth in the quarter. This follows growth of 0.1% in January-March.

In June, the economy also fared better than expected -- with growth of 0.5%.

That follows the GDP fall of 0.1% in May, and growth of 0.2% in April.

The ONS explains:

In output terms, the services sector grew by 0.1% on the quarter, driven by increases in information and communication, accommodation and food service activities, and human health and social work activities; elsewhere, the production sector grew by 0.7%, with 1.6% growth in manufacturing.

In expenditure terms, there was strong growth in household consumption and government consumption, which was partially offset by a fall in international trade flows in the second quarter.

Good morning.

We’re about to discover how the UK economy fared over the spring and early summer, in the face of rising interest rates and the cost of living crisis.

The Office for National Statistics will release its first estimate of UK GDP for the second quarter of 2023, and just for June, at 7am.

Economists fear the economy stagnated in Q2, with no growth, after the meagre 0.1% expansion recorded in January-March.

In June alone, City analysts are expecting to see growth of 0.2%, a modest recovery after the 0.1% contraction in May.

Activity in May was disrupted by the extra bank holiday for King Charles’s coronation, so June could see a recovery in activity in comparison.

Adam Cole of RBC Capital Markets explains:

Though there was an extra bank holiday in May for the Coronation, the impact of that appears to have been less than the impact of similar additional public holidays in 2022. Also, a recovery in activity from strikes the previous month helped compensate.

That is likely to reverse again in June which will drag on activity and act as a counterweight to a moderate recovery in activity in June from the impact of May’s extra bank holiday.

Michael Hewson of CMC Markets reckons the forecasts for stagnation in Q2 are too pessimistic.

Having eked out 0.1% growth in Q1 of this year, today’s UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth.

That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.

Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy.

The data is released at 7am UK time…

The agenda

• 7am BST: UK GDP report for Q2 2023, and for June

• 7am BST: UK trade report for June

• 9am BST: IEA monthly oil report

• 1.30pm BST: US PPI index of producer prices

• 3pm BST: University of Michigan Index of Consumer Expectation