First estimate of UK GDP growth confirms growth slowed in Q1

The Office of National Statistics just released the first estimate of UK Q1 GDP growth (based on approximately 44% of the information). The figures show that growth slowed in Q1 15, down to 0.3 % q/q (Danske Bank 0.4%, consensus 0.5%) from 0.6% q/q in Q4 14. This implies GDP was 2.4% higher than in Q1 14. The slowdown was widely expected as hard data disappointed in Q1, despite strong survey indicators. Growth in Q1 15 was the slowest since Q4 12.

The service sector (78.4% of GDP) was still the main contributor to growth and contributed by 0.4 percentage points to quarterly GDP growth in Q1 (down from 0.7pp in Q4). One of the big disappointments in Q1 was that industrial production (14.6% of GDP) did not contribute despite increasing in Europe (the UK’s biggest exports markets). Construction (6% of GDP) pulled growth down by 0.1 percentage points.

The preliminary national accounts figures are published less than two weeks before the elections (7 May). These are likely to result in another hung parliament, which might be a source of GBP weakness and higher FX volatility – even after the election. Although the slowdown in Q1 was expected, today’s release is negative for the Conservative campaign and positive for the Labour campaign. However, it is difficult to say anything about the significance of this effect.

GBP/USD is slightly lower on the weak GDP figures. The limited response in cable probably reflects a modest appetite for USD ahead of the US GDP data and FOMC tomorrow. We still see potential for renewed USD buying, particularly on the back of the FOMC meeting, when we believe the FOMC will downplay the recent weakness in US data, signalling that this was driven primarily by temporary factors.

Despite slower growth in Q1, we still expect growth to pick up in coming quarters regardless of the election outcome – albeit increased political instability and uncertainty regarding the UK’s EU membership may hurt business and consumer confidence. The reason we expect growth to pick up is that the British economy is currently being stimulated by several factors. First, British workers are experiencing positive real wage growth for the first time since 2009 due to a combination of low inflation and increasing nominal wage growth. A combination of increasing employment and positive real wage growth should support private consumption ahead. Second, it seems growth is accelerating in the rest of Europe, which should increase foreign demand for UK goods. Higher activity in UK export markets should more than offset the negative impact of the stronger GBP in recent months.