Britain’s growth slowdown no “game changer”

October 27, 2015

Australia v Scotland - IRB Rugby World Cup 2015 Quarter FinalBritain’s economic growth slowed more than expected in the third quarter of this year – buying the Bank of England more time as it mulls its first rate hike in over eight years.

Markets have been pushing back the timing of a possible rate hike into late 2016, early 2017 and a Reuters poll on Monday showed that economists too are delaying their forecasts to the second quarter of next year from the first quarter previously.

But analysts say the factors which contributed to a preliminary growth rate of 0.5 percent in Q3 – short of the 0.6 percent expected by the BoE and by economists in a Reuters poll – could be temporary because:

  • Construction output, which had its biggest quarterly fall in three years and placed the biggest drag on Q3 GDP, is notoriously volatile and could bounce back
  • Investec says the main reason for weakness in the manufacturing sector is the past appreciation of sterling and expects a recovery in the sector eventually as those effects dissipate. Manufacturing output fell 0.3 percent in the third quarter, the third consecutive quarterly decline.
  • Growth in services sector, which accounts for about 80 percent of the GDP, remains solid.  

According to HSBC:

(The GDP number added) weight to the argument of MPC (Monetary Policy Committee) doves that there is still insufficient price pressure to be sure that inflation will rise back to target. But today’s number is not a game changer.

Services growth was only slightly weaker than we expected and there is little evidence that this is a trend. If construction growth bounces back, GDP growth could easily pick up again in Q4.

Indeed, a Reuters graphic shows that Britain’s 0.5 percent growth in the third quarter is just below the 0.6 percent quarterly average since 1970.     

UK gdp pic


The question is: will that be enough to bring about future inflation and higher rates?

Some economists warn that the data show Britain’s economic recovery is increasingly one-sided.

Output in the services sector grew 0.7 percent in the third quarter, its biggest rise since the fourth quarter of 2014.

According to Berenberg:

The UK economy is now almost entirely reliant on services for growth… services not only provided all of the growth in the third quarter but, of the three major sectors, it is the only one that has surpassed its pre-recession peak.

Both manufacturing and construction are still below pre-crisis levels and need structural reform to boost the supply side of the market. Otherwise, the prospects of a stronger pickup in output are nowhere in sight.

Graphics by Vincent Flasseur










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