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UK recovery goes from strength to strength

Tuesday, 3 Sep 2013 | 8:25 AM ET
Skyscrapers under construction in London.
Simone Becchetti | Getty Images
Skyscrapers under construction in London.

It's not just Arsenal fans who have had a particularly good few days (they beat their fiercest rivals and signed one of the world's top young talents), as better-than-expected economic data also gives British Chancellor George Osborne a reason to celebrate.

On Tuesday, figures revealed that construction activity in Britain grew at its fastest pace in almost six years in August. The Markit/CIPS purchasing managers'index (PMI) for the sector came in at 59.1 in August, its highest level since September 2007 and far stronger than analysts expected, with Societe Generale Strategist Kit Juckes predicting that the figure would dip to 56.

"The latest Construction PMI figures are yet another indication that the U.K. economy has performed impressively over the summer months," said Markit Senior Economist Tim Moore. The figures followed Monday's manufacturing PMI figures which also showed a jump activity, hitting a two-and-a-half-year high of 57.2 in August.

(Read more: UK manufacturers see strongest rise in orders in August since 1994)

This encouraging PMI data came a week after official figures revealed that the U.K.'s gross domestic product (GDP) expanded by 0.7 percent in the second quarter from the first. This number once again beat economists' forecasts and put Britain's growth rate on a par with Germany, the so-called powerhouse of Europe.

(Read more: Britain's GDP seen strong—But unsustainable)

"About time too," Alan Clarke, director of fixed income strategy and banking and markets at Scotiabank, told CNBC. "We've been longing for this moment for years. We've got this broad-based improvement so long may it continue."

He added that the summer months had turned all expectations about the U.K. economy and its recovery upside down.

"Full year GDP could be anywhere 1.5 or higher," he said. "At the moment, the consensus is 1.2, and only a few months back in April, consensus thought we'd only see half a percentage point growth. So we're a million miles from where we were literally five minutes ago. "

(Read more: Recovering UK economy shows broader,faster growth)

Can the UK keep up its recovery pace?
Alan Clarke, director of fixed income strategy and banking and markets at Scotiabank, discusses the recovery in the U.K. and why Bank of England Governor Mark Carney's forward planning was "the right thing at the right time".

For Howard Archer, chief U.K. and European economist at IHS Global Insight, the latest data points towards growth in Britain becoming "more broadly based, which is important for hopes that the recent improvement can be sustained," rather than just being a feel-good summer boom.

Archer argued that negative construction output in 2012 and in the first quarter of 2013 was significantly detrimental to U.K. GDP. "While the construction sector only accounts for 6.8 percent of total U.K. output, the extent of its weakness meant that it knocked 0.6 percentage point off GDP growth in 2012 which was limited to 0.2 percent," he said.

"Indeed, with the purchasing managers reporting that both manufacturing and construction activity saw improved, robust expansion in August, it is looking ever more likely that the economy can surpass the second quarter growth rate of 0.7 percent in the third quarter." Archer now expects GDP for 2013 to hit 1.4 percent.

Soc Gen's Juckes may have expected construction activity to fall, but he still saw the U.K. economy entering much calmer waters, and highlighted the impact of recent figures on sterling.

"The strength of the data point to further sterling strength," Juckes said in a research note. "A clear break of EUR/GBP 0.85 opens the way for further downside. GBP/JPY should also break through 155 and head for the May high at 156.80 and GBP/CHF looks set to move higher through 1.46 and target May's 1.48 level."

As optimism grows, however, caution is still evident.

Archer stressed that it was of "critical importance" that housing market activity in the U.K.sustained its recent improvement, and that this continued to stimulate residential building.

Furthermore, in an effort to encourage spending and investment the Bank of England said last month that it would not raise borrowing costs while unemployment remained above 7 percent - a level it does not expect to be breached for at least three years. But many economists have expressed concerns that, with the economic data getting better by the day, an interest rate hike may come sooner rather than later.

Still, it is worth nothing that Britain's economy is still 3.2 percent smaller than at its peak in the first quarter of 2008. As Scotiabank's Clarke said: "We've wanted this growth for a long while, but we've got a lot of lost ground to make up for."

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