UK income growth revised upwards as markets hail ‘resilient’ economy

Official data revisions reveal that UK household income grew at a faster rate than initially estimated during the first half of the year. The Office for National Statistics (ONS) reported that income per head increased by 1.1% between January and June, up from the previous estimate of 1.0%. This rise in income occurred alongside an improvement in economic growth, which illustrated the resilience of the UK economy since the outbreak of conflict in the Middle East more than seven months ago.

In the second quarter of 2023, gross domestic product (GDP) increased by 0.5%, surpassing the earlier estimate of 0.4%. This growth rate was on par with that of the US in the first six months of the year. The economy expanded by 0.6% in the first quarter. Analysts suggested that heightened confidence, dubbed the "Burnham bounce," may have contributed to the economic rebound, as the recent byelection paved the way for the former mayor of Manchester to become prime minister.

Households were able to allocate some of the income gains into savings accounts, resulting in an improved savings rate. The rate rose from 8.6% in the first three months to 8.8% in the three months leading up to June. Fund manager Thomas Watts from Julius Baer noted that the data presents "even more positive news for the new administration," following previous revisions that highlighted the UK economy's resilience since the initiation of the US-Israel war on Iran in February.

The upgraded figures are a boon for Chancellor John Healey, as he prepares to present his first budget next month. The substantial jump in GDP per head places the UK among the top performers in the G7, outranking Germany, France, and the US, and trailing only Canada, which recorded a growth rate of 1.3% in the first and second quarters.

Businesses continued to invest, with business investment increasing by 1.8% in the second quarter, estimated to be 5.2% higher compared to the same period a year ago. Kathleen Brooks, the research director at XTB, stated that markets were in an "optimistic mood" following the revisions, attributing the growth to stronger services growth, rising household spending, and a boost in business investment. The trade figures also showed a notable improvement, indicating a surge in exports.

Currency markets reacted favorably to the revised data. Traders speculated that the UK's robust growth rate might prompt the Bank of England to raise interest rates to temper inflation, which stood at 3.1% and exceeded the central bank's 2% target. The British pound surged to a six-week high against the euro and climbed slightly against the US dollar, reaching a one-week high of $1.3292.

Against the euro, sterling was at its highest level since mid-August, with the euro dropping nearly 0.3% to 85.43p. UK government bond yields, indicative of the interest rate on UK debt, eased due to the stronger economic data and lower global oil prices. Two-year UK bond yields fell by 0.05 percentage points to 4.86%, while 10-year UK bond yields decreased by four basis points to 5.356% on Wednesday.

Rising oil and gas prices since the conflict's onset caused Brent crude prices to climb back above $100 a barrel, though they have since eased.