UK growth came in at a crawl year-on-year for the first quarter of 2018 – just 0.1% according to the Office of National Statistics (ONS). GDP figures nearly always hit the trading tone for sterling and likely Bank of England monetary policy direction – and this morning was no exception.
Sterling plunged -0.73% on the news to 1.3816. Sterling has been all over the place in recent weeks, tumbling from close to $1.44 to $1.38.75 (pre GDP announcement this morning, 8.45am), not helped by a stronger dollar.
The dismal growth numbers for Q1 must mean pressure on the Bank of England to delay hiking interest rates. The ONS said UK GDP growth was the slowest since Q4 2012, with construction seeing the largest downward pull on GDP, falling 3.3%.
"The question now," said Ben Brettell, senior economist at Hargreaves Lansdown," is whether the slowdown can be fully attributed to the Beast from the East, or whether there are more worrying factors at play."
Cold snap hits economy
Services – a huge chunk of the UK economy – grew by 0.3% when compared with the previous quarter said the ONS. “But while three of the four sectors within services experienced growth this quarter, there was a fall in distribution, hotels and catering."
Manufacturing growth slowed to 0.2%. This fall in growth “was spread across a number of manufacturing industries,” said the ONS. “However, there is no evidence to show that the fall in the manufacturing growth was due to the effects of the snow.”
Indeed, the bad weather actually helped some areas of the economy. "While the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales," said Rob Kent-Smith from the ONS.
Carney's recent warning
The pound’s slippage had previously been given a push south by bearish remarks from Bank of England governor Mark Carney on the diminishing chances of a May interest rate rise. “We have had some mixed data,” Carney said last week. “On the softer side, some of the business surveys have come off. Retail sales have been a bit softer — we are all aware of the squeeze that is going on in the high street.”
Carney was referring to weaker March UK retail sales, down -1.2% though the biting early spring cold was, in the background, a factor for keeping consumers off the high street. But quick analysis on the GDP numbers shows that the slowdown in services was not broad based – it was concentrated mainly in the retail sector, claims Capital Economics, which tends to be hit hardest by bad weather.
"As a result," said Paul Hollingsworth, senior UK economist at Capital Economics, "this slow patch should prove to be transitory, if past experience is anything to go by. Nonetheless, the Monetary Policy Committee is unlikely to be confident enough in two weeks’ time that there isn’t some underlying weakness too."
Rate rise chill?
Either way a May interest rate hike now looks a dead duck predicts Jacob Deppe, head of trading at Infinox. “In fact, given Bank of England Governor, Mark Carney, warned over weak retail sales and softer levels of business investment just last week, until, or unless, the economic picture improves it seems unlikely that interest rates will go anywhere."
A May rate rise decision had more or less been assumed by the City as – almost – rock-solid till recently. However the uncertainty around today’s GDP figures induced a dose of jitters before the 9.30am announcement. Today’s announcement must set sterling’s tone for the immediate few weeks.