The U.K. economy grew 0.4% in the second quarter, keeping it on track for the strongest growth of any G7 nation for a second straight quarter. But the Iran war and the closure of the Strait of Hormuz threaten to reverse that lead, with Treasury officials reportedly modeling a sharp growth downgrade for next year.
Official data published Thursday showed the U.K. economy grew by 0.4% in the second quarter, following 0.6% expansion in the first quarter. Business investment climbed 1.7% over the same period, defying a Reuters poll of economists that had forecast a 0.5% decline.
The figures keep Britain on track to record the strongest growth of any G7 economy for a second straight quarter, Deutsche Bank chief U.K. economist Sanjay Raja said Thursday. Raja put the annualized growth rate across the first half of the year at 2%. Higher prices at the pump could still squeeze household incomes, he added, though he now sees modest upside risks brewing.
Treasury models a sharp downgrade
The rebound comes as new Prime Minister Andy Burnham confronts a darker outlook tied to the Iran war and closure of the Strait of Hormuz. In April, the International Monetary Fund warned that the U.S. and Israel's war with Iran would hit the U.K.'s growth prospects harder than any other rich country, given Britain's heavy reliance on oil and gas imports and its sharper recent spike in goods inflation.
Bloomberg reported Wednesday that Treasury officials had presented worst-case scenario modeling to Burnham. The Treasury figures reportedly suggested growth could slow to just 0.3% next year if disruption on the Strait of Hormuz persists. The Treasury did not respond to a CNBC request for comment.
Economists split on how long the rebound holds
Tomasz Wieladek, chief European macro economist at T. Rowe Price, pointed to encouraging signs that growth had shifted from higher government spending toward stronger private-sector performance. Still, according to Wieladek, the notion the Middle East conflict has left the British economy unscathed is "likely too good to be true". Growth in the first two quarters is normally reported stronger than in the second half of the year, he said.
Shaniel Ramjee, co-head of multi asset at Pictet Asset Management, noted that growth was concentrated in Britain's dominant services sector. Hot weather boosted services, he said, but construction and industrial production are down on the year even as the world sees a global infrastructure boom.
Source: CNBC
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