UK economy perks up slightly as Bank of England nears rate decision

By Andy Bruce and William Schomberg

LONDON (Reuters) - Britain's economy picked up a bit of speed in May after slowing in early 2018, according to official figures that are likely to give the Bank of England more confidence about raising interest rates next month.

A new monthly reading of gross domestic product showed the world's fifth-biggest economy grew by 0.3 percent in May from April.

That was up from growth of 0.2 percent in April and in line with the forecast in a Reuters poll of economists, marking the strongest growth since November, the Office for National Statistics said on Tuesday.

Sterling fell against the dollar after the data, which showed a mixed picture of the economy. Growth came mostly from the dominant services sector while factory output disappointed.

But Cathal Kennedy, an economist at RBC Capital Markets, said the figures should support expectations that the BoE would raise rates in August.

"The gradual momentum into May really backs up what the Bank has been saying of late. We have seen a bounceback from the first quarter," he said.

BoE Governor Mark Carney and other top officials at the central bank opted not to raise rates in May because of the early 2018 slowdown.

Instead, they decided to wait for signs the weakness was temporary and caused by unusually cold winter weather rather than a sign of broader problems before Britain's exit from the European Union next year.

However, upheaval in the government of Prime Minister Theresa May -- battling to keep her grip on the ruling Conservative Party, which is split over Brexit -- could yet affect confidence among employers, a potential new hurdle for the BoE.

Britain's economy grew by 0.2 percent in the three months to May, as expected, after stagnating in the three months to April.

In annual terms, the economy was 1.5 percent bigger than in May last year, the ONS said.

The BoE's rate-setting committee is expected to raise rates by 25 basis points to 0.75 percent -- only its second rate increase in more than a decade -- on Aug. 2, according to a Reuters poll of economists.

SERVICES-LED GROWTH

The ONS said the warm weather and spending around the royal wedding of Prince Harry and Meghan Markle helped the economy.

Britain's services industry grew 0.3 percent month-on-month in May, slowing from an upwardly revised 0.4 percent in April.

Over the three months to May, growth in services -- which makes up 80 percent of economic output -- picked up speed to 0.4 percent from 0.2 percent.

But industrial output fell unexpectedly in May by 0.4 percent on the month, hit by the shutdown of the Sullom Voe oil and gas terminal.

Manufacturing growth also disappointed, rising only 0.4 percent on the month -- less than half the growth rate expected in the Reuters poll.

May capped the weakest three months for British factories since December 2012.

There was better news from construction, which had struggled in the bad weather of early 2018. Output jumped 2.9 percent in May, far exceeding expectations and marking the first growth in the sector since December.

Separate data showed Britain's deficit in goods trade during May was broadly unchanged from April at 12.362 billion pounds ($16.37 billion).

($1 = 0.7549 pounds)

(Editing by Larry King)