GDP data indicates UK economy growth shows signs of slowing

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20 Nov 2015

Posted in:  Business

The most recent GDP data for the UK economy indicates that the pace of growth has eased slightly. It slowed from 0.7% in the second quarter to 0.5% in quarter three, on a quarterly basis. In year-on-year terms, GDP has slowed from its 3% rate registered in 2014, although at 2.3% it remains solid says John Fahey, Senior Economist atAIB.

The breakdown of GDP showed that the services sector remained the key source of growth in the third quarter, contributing around 0.6 percentage points, with business and financial services a strong performer in this sector. Industrial production made no contribution to growth, while construction was a 0.14 percentage point drag in the quarter. Although the expenditure breakdown of third quarter GDP is not due for release until the end of this month, the retail sales figures for the period suggest that consumption remains a key driver of growth.

Retail sales grew by a robust 0.8% for a second consecutive quarter. Elsewhere, in the UK domestic economy, the housing market has continued to show improving signs, with prices and transaction levels on a broadly upward trajectory. The labour market also continues to improve. Employment grew by 177,000 in the three months to September, compared with a decline of 63,000 the second quarter. The unemployment rate fell to 5.3% in the three months to September, its lowest rate since June 2008.

However, a small rise in the claimant count data in recent months suggests that the unemployment rate could struggle to fall further in the near term. Meanwhile, there has been a sharp pick-up in wage growth in the UK economy over the past 12 months. The figures show that year-on-year growth in earnings (before taking account of bonuses) averaged 2.5% in the nine months to September. That compares with a 1.2% average growth rate in 2014. At the same time, CPI inflation has been stuck at around 0% since February. It remains weighed down by the impact of low energy prices, as well as declines in food prices.

However, the upside to this is that it has helped to boost real wage growth, providing support to the already healthy performance of consumer spending. From a Bank of England perspective, this very weak inflationary environment, as well as signs of some loss of momentum in the economy, have coincided with a more cautious tone on monetary policy. Indeed, its November Quarterly Inflation Report and minutes from the bank’s most recent policy meeting struck a doveish tone. The bank’s assessment is that the global growth outlook has deteriorated since the August inflation report and that there remains “downside risks” to this outlook.

It also observed that a number of factors continue to dampen inflation, including sterling’s “past appreciation” and that this is “expected to persist”. Thus, the Bank of England is trying to weigh up two contrasting forces in its policy deliberations in deciding the timing on increasing interest rates. On the one hand, there is the picture of weakening external demand, mainly due to a slowdown in emerging markets. On the other hand, the domestic economy has remained resilient. Overall, against this backdrop, the bank appears to be some way off increasing interest rates and even then, the tightening process is likely to be very gradual. Indeed, current market pricing does not envisage a UK rate hike until the end of next year.

In terms of the macro outlook, moderate employment growth, weak inflation, improved real wages, a stronger eurozone economy and low interest rates all suggest that the UK economy should continue to grow at a reasonable pace. It still faces some headwinds, including high household debt, fiscal tightening, the negative drag on trade from a stronger sterling, and the risks and uncertainty surrounding the EU referendum vote, as well as slower growth in emerging economies. Thus, UK GDP growth may be slowing towards a 2% to 2.5% range, compared with 3% in 2014.

Source: Irish Examiner November 17th2015

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