A look at the latest reports on the UK economy.

The Bank of England is once again maintaining the official Bank Rate paid on commercial bank reserves at 0.5%, and the stock of asset purchases financed by the issuance of central bank reserves remains at £200bln, both unchanged since 2009.

GDP has grown by around 0.2% in the second quarter, according to the Office for National Statistics, following an increase of 0.5% in the first. This reduced underlying growth can be partially attributed to the offsetting effects of erratic falls in energy and construction output within Q1.

Special events within Q2, such as the additional April bank holiday, the royal wedding and supply-chain disruptions caused by the Japanese tsunami should also be taken into account.

Industrial production has increased by 0.9%, according to the minutes of the Monetary Policy Committee meeting in early July. Despite this, there are early indications that underlying growth may be further reduced in Q3, within both services and manufacturing.

Gross domestic product

The economy has now recovered more than 40% of the output that was lost through the recession, as well as expanding by 2.7% since it ended. This is a clear contrast, if moderate, to the loss of 6.4% that occurred during the recession.

GDP growth in Q2 appears to be driven by the service sector, at 0.5%, with a particular focus on business services at 0.7%. Unfortunately, this was offset by negative growth in the production sector of 1.3%. Output in mining and quarrying and utilities sectors both suffered, falling by 6.5% and 2.7% respectively, with manufacturing output falling by 0.3%. The construction sector showed growth at a restrained pace of 0.5%, which does mark an improvement on the negative growth of the previous two quarters.

Mortgage lending

Gross mortgage lending totalled an estimated £12.6 billion in June, an increase of 16% from the £10.8 billion lent in May, according to the Council of Mortgage Lenders. However, this is still 3% lower than June 2010, which totalled £13 billion.

CML chief economist Bob Pannell denotes that the disappointing economic growth and strong consumer price pressures, alongside the uncertain jobs market, have had a negative effect on purchase decisions relating to home ownership. In contrast, rental demand has increased.

While UK households appear to have made progress in bringing down debt burdens, it should be noted that this stems mainly from restricted levels of mortgage lending, unsecured write-offs and nominal income growth, rather than households repaying their mortgage debts more quickly.

Housing prices

Over the past year, the UK housing market has remained generally stable, the combination of a slowly improving economy and sustained low interest rates helping to support this.

Nationwide figures show that UK house prices rose just a modest 0.2% in July, 0.4% lower than the prices of a typical home last year. The three month on three month measure of house prices – a good indicator of the near term price trend – has changed little from the 0.4% rate of increase recorded in June, having only decreased by 0.1% to 0.3%.

Regarding the low interest rate, Halifax notes that the typical mortgage payments have fallen 20% from a peak of 48% of average disposable earnings in mid 2007, to 28% in Q2 of 2011, helping to improve affordability. Mortgage rates have also fallen, from an average of 5.84% to 3.85%.

The industry-wide number of approvals remains within the range of 45,000-50,000 per month since early 2010, also helping to indicate broad stability in market activity. However, housing economist Martin Ellis states, ‘the market is...likely to continue to face significant headwinds, which are expected to constrain housing demand,’ with ‘low earnings growth, higher taxes and relatively high inflation...all continuing to put pressure on household finances’.

Labour market

The slowly improving economy is no doubt related to the recent increase in employment, which has been an important factor in supporting the housing market.

Total employment has risen by 1.4% from Q1 2010 to Q1 2011. This quarter is also seeing an increase in overall employment of 0.4% (118,000), in contrast to the past three months, according to the Office of National Statistics.

Increase in total employment can be attributed to an increase in full-time work, the number in Q1 2011 up 94,000 from the previous quarter to 21.3 million. Part-time employment has also increased to 7.94 million, up 24,000.