Britain’s economic growth bounced back in the second quarter of the year, fanning the debate about the timing of the first rise in interest rates since the financial crisis.

Growth in the three months to June stood at 0.7%, according to official figures, following a below-par rise of 0.4% in the first quarter. The second-quarter number was in line with City expectations, but the services sector fuelled the growth as manufacturing declined, prompting warnings from economists that the recovery is being powered by a two-speed economy.

There were signs, however, that living standards are returning to their pre-crisis levels after the Office for National Statistics said GDP per head was now “broadly equal” to the first quarter of 2008, before the banking crisis drove the UK into recession.

UK growth accelerates to 0.7%, but manufacturing shrinks - live updates Read more

Vicky Redwood, chief UK economist at Capital Economics, said growth was unbalanced. “The services sector drove the rise in GDP, while construction output was flat and manufacturing output fell. But at least it looks as though productivity growth is continuing to pick up,” she said.

Economists were looking for clues for the timing of change to interest rates, which have been at a low of 0.5% since March 2009, after the warning earlier this month from Mark Carney, the governor of the Bank of England, that a rise in interest rates was “moving closer”.

The Bank’s monetary policy committee will be giving its view on rates on 6 August, amid expectations that there could be a split among its nine members. “We suspect that two members of the MPC may well vote for a rate hike in August although there may not be critical mass until February next year,” said James Knightley, an economist at banking group ING.

The strength of sterling was blamed by some economists for the 0.3% fall in the manufacturing sector, and after the data was released the pound rose again against the dollar and the euro as investors continued to bet on an interest rate rise perhaps as soon as the end of the year.



“Sterling strength has clearly been a key driver behind the re-emergence of the two-speed economy, making life more difficult for export focused UK manufacturers,” said Victoria Clarke at stockbrokers Investec.

George Osborne (@George_Osborne) GDP growth 0.7%. Shows Britain motoring ahead with economy producing as much per head as ever before. We must stay on road we've set out on

The TUC general secretary, Frances O’Grady, said: “The government’s economic plan is not delivering what was promised. We were told there would be a march of the makers, but instead manufacturing continues to decline. And while there is a desperate need for affordable homes, construction output remains in the doldrums.”

The CBI, the employers’ body, also pointed to the struggle to achieve manufacturing growth. “Performance is mixed across sectors, with UK manufacturers going through a tough time as the stronger pound hits sales into the eurozone. Meanwhile, the eurozone is still grappling with uncertainty over the Greek bailout,” said Anna Leach, CBI head of economic analysis.

However, the chancellor, George Osborne, tweeted that the data “shows Britain motoring ahead with the economy producing as much per head as ever before. We must stay on road we’ve set out on.”

The services sector rose 0.7% – contributing 0.5 percentage points of the increase on the previous quarter – while production was up by 1% as a rise in oil and gas outweighed the fall in manufacturing. Agriculture decreased by 0.7%.

Year-on-year, GDP was 2.6% higher. The ONS said the second quarter was 5.2% higher than the pre-downturn peak of January to March 2008. From that peak at the start of 2008 to the trough – the second quarter of 2009 – the economy shrank by 6%, it said.

Knightley said: “The UK economy is now 5.2% larger than its pre-recession peak and GDP/capita is back to those early 2008 levels. Consequently, the amount of spare capacity in the UK economy continues to shrink. This is now translating into rising wage pressures and growing talk from Bank of England officials that interest rate rises may not be that far away.”

Clarke noted that any rate rise might push sterling higher, causing more difficulties for manufacturers, while the headline growth in GDP was showing that momentum was building in the economy. The data, she added, “underlines the dilemma of sorts that the MPC faces in guiding markets on its policy stance ahead and particularly on its likely path to rates liftoff”.