UK: Growth rebounded to 0.5% q/q in Q4 15

The Office of National Statistics has just released the first estimate of UK Q4 15 GDP growth (based on less than 50% of the total information required for the final estimate). The figures show that growth increased to 0.5% q/q in Q4 from 0.4% q/q in Q4, in line with our expectations and consensus. Overall, GDP grew by 2.2% in 2015 down from 2.9% in 2014.

The service sector (78.4% of GDP) was still the main contributor to growth. Services increased by 0.7% q/q and thus contributed by 0.52 percentage points to quarterly GDP growth in Q4. Construction (6.4% of GDP) declined by 0.1%, which was better than expected. Thus construction contributed neither positively nor negatively to growth. Total industrial production (14.6% of GDP) fell 0.2%, which was not enough, however, to drag overall GDP growth down by more than 0.03pp due to the low weight. The fall in total industrial production was caused by a fall in mining & quarrying of 1.4% q/q, which was the first decline since Q3 14. Manufacturing production was unchanged in Q4. Manufacturing production is still struggling with the slowdown in manufacturing globally and the past GBP appreciation.

Going forward, we expect the UK to grow at a similar pace around 0.5% q/q (or perhaps marginally higher). Growth will continue to be driven by services (domestic demand) but we also expect the manufacturing cycle to turn, which should help the struggling manufacturing sector in the UK. However, as we wrote in our latest macro forecasts for the UK, we think Brexit uncertainty is the biggest threat to the upturn (published 6 January).

Although Bank of England (BoE) will be happy to see that growth rebounded in Q4, it does not significantly change its assessment of the economy. Very low inflation, subdued wage inflation and financial turmoil are reasons enough for BoE to be patient. The BoE February meeting takes place next week and at this meeting we will get an updated Inflation Report and Carney will be answering questions at the following press conference. We already know that BoE is likely to take another dovish stance as BoE governor Mark Carney recently held a very dovish speech in which he explained why BoE is not ‘Fed light’. Still, the new Inflation Report is set to attract attention since we will get more precise information about how the latest developments in the global economy and financial markets have affected BoE’s view on the economy in terms of growth, unemployment and inflation forecasts.