UK economy remained fragile, though recovery stronger than thought

Recovery in the UK this year had been stronger than thought, though it remained fragile, burdened by weak trade and business investment, official figures showed.

Confirming its estimate of 0.7 per cent growth in the three month to June, the Office for National Statistics (ONS) upgraded the first quarter from 0.3 per cent to 0.4 per cent. It reiterated that the economy was firing all cylinders, with expansion in all three key sectors – services, production and construction.

The ONS however said growth over the past 12 months had been slower than previously thought.

It added, GDP had expanded by just 1.3 per cent in the last year, rather than the 1.5 per cent calculated previously, due to downgrades in the final two quarters of 2012.

For 2012 as a whole, the ONS revised growth downwards  from 0.2 per cent to just 0.1 per cent and consequently, the economy remained 3.3 per cent smaller than before the financial crisis.

Economists however, remained upbeat about prospects for the rest of 2013, in the backdrop of signs of improvement but said the backward-looking data was slightly disappointing.

Business investment was down by £786 million in the three months to June to just £28.7 billion its second worst reading since the depths of the recession in September 2009.

Investment in machinery and equipment was down by £1.2 billion to £9.8 billion, the slump giving cause for concern for the government, which had originally hoped corporate spending would help drive growth.

The recovery, however was being powered by consumer spending, rather than exports and investment, raising doubts about the sustainability of this year's solid economic upturn.

There was confirmation in the latest official estimate of GDP in the second quarter that the economy grew by 0.7 per cent over the second quarter, but the activity it was revealed was driven by consumer spending and by firms building up their inventories.

Consumer spending stood 0.3 per cent higher on the quarter, and up 1.8 per cent on an annual basis.

The overall upbeat outlook also gained support from the latest GfK/European Commission Consumer Confidence Index which increased in September to its highest level since November 2007.

The Office for National Statistics  said, net trade, accounting for most of the 0.4 per cent growth registered in the first three months of the year, did not make any contribution whatsoever in the second quarter, with a surge in imports canceling out the benefits of rising exports.

Business investment was down 2.7 per cent on the previous quarter and was declining a hefty 8.5 per cent on an annual basis. Gross capital formation was positive due to firms increasing their stockpiles.