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.
“Looking at real wage growth and business investments’ intention,” Danske Bank said before the ONS announcement broke, “it is difficult to see a scenario with much higher GDP growth in the UK this year despite the political agreement on transition.”
Retail woes emphasis
The UK’s current economic growth rate remains the lowest among the G7 industrial countries. The UK has been held back by a long winter, inevitably impacting consumer sentiment (though the UK’s labour figures are rather more positive – headline unemployment fell to 4.2% from 4.3% between February and December).
Yesterday new figures from the National House Building Council (NHBC) confirmed that the amount of new UK houses registered to be built in the first three months of 2018 saw a 14% slump – the most severe quarterly drop since 2013.
The broader building issue is a lack of confidence – especially among commercial property developers says Blane Perrotton, MD of national property consultancy and surveyors, Naismiths.
"As commercial property demand cools ahead of Brexit, developers are concentrating on completing existing projects rather than commissioning new ones. It's this that's feeding through into the poor economic data."
UK economy superficially strong – EY ITEM Club
Earlier in the week Howard Archer, chief economic advisor at the EY ITEM Club said the UK’s economic outlook looked stable – on the surface. “Inflation, which impacted consumer spending last year, continues to drop and we expect a tight jobs market to deliver some uptick in pay growth.”
But Archer lamented that the UK economy was chugging along at a too-pedestrian pace. While a transitional Brexit agreement between the UK and EU has been agreed, which should support UK investment, the deal still needed ratification, he warned.
“These factors may be offset by rising interest rates, a recovery in sterling’s value and still appreciable Brexit uncertainties bringing new headwinds over the year.”
Outshone by France and Spain
The EY ITEM Club claims household income growth could rise 1.1% in 2018 and a chunky 1.4% in 2019. That is a massive upgrade on 2017’s 0.2% income climb. If proved true it may be supported, possibly, by UK inflation continuing to slip, lessening the pressure on household incomes further.
Earlier this morning European GDP data arrived, reinforcing some worries about a slowdown. French GDP growth slipped to 0.3% in Q1 compared to 0.7% growth in Q4. This 0.3% figure – a chunky fall – is the weakest in more than 12 months.
However Spain posted a 0.7% GDP growth figure for the first quarter earlier this morning, consolidating 0.7% growth for the last nine months, or past three quarters.