Small upward revision from 1.1% to 1.2% QoQ

GDP growth in Q2 was revised up from 1.1% to 1.2%. That was unsurprising, given data already available showing stronger construction sector output compared to the preliminary estimate of GDP. But GDP growth was erratically strong over the quarter: we think the average of Q1 and Q2 - at around 0.7% QoQ - gives a more accurate view of underlying growth in the first half of the year. Moreover, the level of GDP remains around 4.6% below its peak in 08Q1. With fiscal policy tightening and the US economy fading, we expect slower growth in the second half of the year: averaging around 0.4% QoQ.

It is nevertheless notable that in nominal terms, the economy has grown robustly in recent quarters. Compared with normal pre-recession rates of around 5.5%, GDP increased at an annualised pace of around 4.5% in 09Q4, 8.3% in 10Q1, and 6.9% in 10Q2. However, a large part of that has reflected strong (moreover unexpectedly strong) price rises rather than gains in real output. Indeed, with CPI inflation pushed up by another VAT rise in 2011, above-target inflation will likely continue to dampen the recovery in the real economy over the next few quarters.

Nominal consumer spending has risen particularly strongly in recent quarters: at a 6% annualised pace in both 09Q4 and 10Q1, and a near-9% pace in 10Q2. Although - as a result of high inflation - real consumer spending has been much weaker than that, it nevertheless rose at its fastest pace since Spring 2006 over the quarter. But slowing in the housing market and fading consumer confidence seem consistent with a slowing ahead, in our view.

Changes in inventories contributed around 1ppt to GDP growth over the quarter, with firms actually raising their inventories for the first time since 08Q3. De-stocking accounted for nearly 40% of the peak to trough decline in GDP, but has reversed notably over the last year. Net trade imparted a broadly neutral contribution to growth. The boost to real GDP growth from net trade has been somewhat weaker than expected over the last few quarters, with exporters primarily using the fall in sterling to raise prices rather than to expand market share. Nevertheless, there have been some reports of that starting to reverse more recently.