Buoyant UK keeps Brexit fears at bay

EU vote has only ‘limited effect’ as quarterly growth of 0.6pc in the economy is better than expected

THE UK economy grew at a faster-than-expected pace in the second quarter, as official figures showed uncertainty in the run-up to the EU referendum had a “limited effect”.

The economy expanded by 0.6pc between April and June compared with the first three months of the year, when growth was 0.4pc. This was stronger than economists’ expectations of 0.5pc. Compared with the same quarter a year earlier, the economy expanded 2.2pc.

Growth was driven by Britain’s dominant services sector, which expanded by 0.5pc over the period, according to the Office for National Statistics (ONS). Joe Grice, the ONS’s chief economist, said that “any uncertainties in the runup to the referendum seem to have had a limited effect”.

While the figures show that growth was robust in the approach to the Brexit vote, economists have highlighted that this is mainly due to a stronger performance in April. The ONS’s first estimate of growth is based on just 44pc of the data it will eventually collect, with growth for June mostly estimated by statisticians.

Official figures for May showed the services sector, which powers almost 80pc of UK output, shrank by 0.1pc compared with April, when it grew at a monthly pace of 0.6pc. Estimates by the National Institute of Economic and Social Research suggest economic growth slowed sharply at the end of the second quarter.

Martin Beck, senior economic ad- viser to the EY ITEM Club, said the official growth figures represented “one last hurrah” for the economy before it entered a “softer and more turbulent period”.

A separate survey by the Confederation of British Industry showed UK retail sales fell to their lowest in more than four years in July. However, the business group warned against reading “too much, too soon” into the data.

The GDP data came as the International Monetary Fund (IMF) warned that sterling had remained overvalued, despite its steep falls since the EU referendum. The fund said the pound’s level in 2015 was between 5pc and 20pc “above the level consistent with fundamentals and desirable policy settings”.

The 7pc drop in the real value of sterling against a basket of other currencies in the first four months of this year, plus its sharp fall in the wake of the Brexit vote on June 23, went “in the direction of reducing exchange rate overvaluation”.

However, the IMF said the UK’s departure from the EU could further reduce the value of the pound – adjusted for domestic costs – if an exit resulted in higher trade barriers.

Across the Atlantic, the Federal Re- serve kept policy unchanged at its July meeting, as policymakers said that economic risks had receded, opening the door for a possible rise in rates.

The Federal Open Market Committee (FOMC), which decides on US monetary policy, said the economy had “been expanding at a moderate rate” and that “near-term risks” to the outlook had diminished.

The comments were interpreted as a sign from the Fed that it had not been perturbed by the UK’s vote to leave the EU, a decision which some members of the FOMC had suggested could affect the pace of US interest rate increases.