The robust expansion in the three months to June was
bolstered by consumers using up their savings and a big rise in government
spending ahead of a severe austerity drive which is likely to hamper the
economic recovery.
The Office for National Statistics said on Tuesday the
economy grew 1.2 percent in the second quarter, confirming an earlier estimate
and in line with economists' forecasts. First quarter growth was revised up to
0.4 percent from 0.3 percent.
That had little impact on financial markets, although
sterling rose after separate data showed a surge in retail sales and that
Britain's current account deficit narrowed more than expected in the second
quarter.
The economy has bounced back strongly from its deepest
recession since World War II but most economists expect growth to slow sharply
when planned government spending cuts start to bite. There are also concerns
about weak global demand.
"There are still very good reasons to be cautious
over the sustainability of the economic recovery," said Jonathan Loynes at
Capital Economics.
As such, the Bank of England is expected to keep monetary
policy extremely accommodative well into next year.
However, the Confederation of British Industry said
retail sales growth surged at its fastest pace in more than six years at the
end of August and start of September, thanks to a bumper August bank holiday
weekend.
And the International Monetary Fund said on Monday that
the Conservative-Liberal Democrat coalition's budget deficit reduction plans
would support a "balanced recovery" even if growth was hampered at
first.
The GDP data showed consumers are running down their
savings quite severely, boding ill for continued consumer spending. The
household saving ratio fell to 3.2 percent in the second quarter from 5.5
percent in the first three months of the year, its lowest since Q3 2008.
Bank of England Deputy Gov. Charles Bean said in an
interview on Monday evening that the whole point of the bank keeping policy
ultra-loose was to encourage consumers and businesses to spend in the
short-term, rather than save.
"When the fiscal contraction hits households next
year and when the public sector is likely to be shedding jobs, and job
prospects become less certain, it's very hard to see how households can do
anything but retrench next year," said Peter Dixon, an economist at
Commerzbank.
Government spending grew by 1.0 percent on the quarter,
its fastest rate since Q4 2008 and construction output surged 9.5 percent
during the second quarter, its fastest rate of expansion since 1963 as it
caught up after winter disruption.
Industrial production grew an unrevised 1.0 percent on
the quarter and growth in services output was revised down slightly to 0.6
percent from 0.7 percent.
The second-quarter current account data showed that
Britain's deficit with the rest of the world narrowed to 7.383 billion pounds
from an upwardly revised 11.298 billion pounds in the first quarter.
That was better than expected and reduces Britain's
current account deficit to 2.0 percent of GDP from 3.1 percent in the first
quarter.
