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UK economic recovery tops headlines ahead of GDP figures

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UK economic recovery tops headlines ahead of GDP figures

Signs the UK economy may be headed out of recession appeared last week following the release of several high profile reports. Retail sales and the Producer Price Index outpaced expectations, as did average wage hikes and unemployment claims. On the back of a rapidly expanding services sector, the UK economy appears poised for rebound ahead of Thursday’s second quarter GDP figures.

Economic growth in Britain has been capped by high unemployment, weak industrial production and declining foreign trades, which have prompted the Bank of England to undertake unprecedented measures to stimulate the economy, including record low interest-rates and massive stimulus. Earlier this month the central bank opted to hold interest rates steady at 0.5 percent, while also leaving its stimulus pledge unchanged at £375 billion. These measures have thus far been unsuccessful in fixing the UK’s worst downturn in nearly 100 years.

For all its problems, the British economy has gained momentum in recent months. First quarter GDP grew 0.3 percent, signalling the economy may finally be headed out of contraction. On Thursday Bloomberg economists expect second quarter GDP to increase 0.6 percent, doubling the first quarter growth rate.

The biggest factor driving Britain’s GDP growth has been an expanding services sector. Services PMI during the second quarter beat expectations, and in June reached a 27-month high. The manufacturing and construction sectors have also made modest contributions to GDP. In June the manufacturing sector posted its strongest growth in more than two years, and construction output expanded for the second straight month.

While GDP growth is expected to double quarter-on-quarter, analysts warn growth may not be sustainable. Growth is projected to resume for the rest of 2013, but could face considerable slowdown in 2014, as declining real wages and high inflation continue to impact the already over-extended household sector, which is fueling the Kingdom’s growing debt.

If GDP growth hits the expected target of 0.6 percent, this would mark the highest quarterly rate in three years, a promising sign for the struggling UK economy. In the long-run, however, growth of this magnitude will be capped by underlying structural challenges facing the UK economy, which has yet to fully recover from the 2008 financial crisis.

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