Britain is not yet in recession, revised data showed on Friday in a boost for under-fire Prime Minister Liz Truss, but its economy may still face a downturn on soaring interest rates.
Gross domestic product expanded 0.2 per cent in the second quarter, said the Office for National Statistics in an upgrade from its previous estimate of a 0.1 per cent contraction.
Even if the economy has shrunk in the current third quarter that ends on Friday, as the Bank of England forecasts, it would mean the UK had avoided two successive quarters of contraction – the technical definition of a recession.
The turnaround follows a rough week for new PM Truss as the country's borrowing costs soared and the pound hit a record dollar-low after her government announced a controversial budget plan on September 23 that included a cap on soaring energy bills.
Truss and finance minister Kwasi Kwarteng met on Friday with Britain's fiscal watchdog to discuss the economic and fiscal outlook in the wake of last week's announcement of also debt-fuelled tax cuts.
"We will deliver the first iteration of that forecast" next week, the Office for Budget Responsibility said in a statement after the meeting.
The country's economy output remains fragile, with Friday's ONS data also revised to show that it was still below pre-COVID levels.
'Calamitous week'
"In what has been a calamitous week for the UK economy, there was a rare glimmer of hope... (with it) defying expectations of a recession – for now," said Interactive Investor analyst Richard Hunter. "Sterling has also found some cautious support... although the jitters will remain as the government continues to justify and explain the implications of its fiscal largesse."
Investors were spooked this week by the huge amount of borrowing likely needed for a UK budget seen as benefitting the rich more than the poorest during the cost-of-living crisis.
Investors were spooked this week by the huge amount of borrowing likely needed for a UK budget seen as benefitting the rich more than the poorest during the cost-of-living crisis
Less than a month into the job, Truss is already deep in a financial crisis.
The pound on Monday collapsed to an all-time low at $1.0350 on fears the budget would make sky-high inflation worse and cause the Bank of England (BoE) to hike its main interest rate even more aggressively.
Sterling has since recovered slightly.
The upbeat GDP figure came two days after the BoE carried out emergency action to snap up government bonds, whose yields had soared following the budget.
And the central bank is forecast to hike its interest rate far beyond the current 2.25 per cent, which compares with a record-low 0.1 per cent less than a year ago, as markets fear ever-higher inflation.
This in turn could see businesses closing and home-owners defaulting on their mortgages.
'Good news, bad news'
Despite growth in the latest quarter, the UK economy is 0.2 per cent smaller than its pre-pandemic size, the ONS added on Friday.
The statistics office previously had the UK economy at 0.6 per cent larger than in 2019.
"The good news is that the economy is not already in recession," said Capital Economics analyst Paul Dales. "The bad news is that contrary to previous thinking, it still hasn't returned to pre-pandemic levels."
The ONS also said the UK economy slumped 11 per cent in 2020 on fallout from the COVID pandemic. It then rebounded with 7.5 per cent growth in 2021.