The slowdown in the Eurozone may be exerting some headwinds on the U.K. economy which has been among the strongest performers among advanced economies over the past year or so.
While a breakdown of the GDP data into its underlying demand components will not be available until mid-November, monthly data give us an idea of what exactly is going on in the U.K. economy. Growth in real consumer spending on goods downshifted from 1.5 percent (not annualized) in Q2 to 0.3 percent in Q3. Weaker spending growth may reflect lackluster growth in average hourly earnings. Growth in employment has slipped a bit recently but generally remains solid, up 46,000 in August. In addition, consumer confidence has edged lower recently, which may reflect concerns over growth in the Eurozone and geopolitical tensions in the middle east and Russia/Ukraine.
Speaking of slower growth abroad, the value of British exports has trended lower in recent months. Slower growth in some major foreign economies may help to explain the pullback in the manufacturing PMI to 51.6 in September.
That said, we expect growth to remain relatively firm in the coming quarters, despite easing from the current 3.0 percent annualized pace. With regard to monetary policy, we still see the Bank of England commencing a tightening cycle in the first half of next year, barring further unforeseen shocks in the global economy. While the pound has fallen against the greenback recently, we expect to see some appreciation in the near-term, especially if the BoE does indeed act prior to the Fed, as we currently expect.
GDP Growth Downshifted a Bit in Q3
Recently released data show that real GDP in the United Kingdom grew 0.7 percent (3.0 percent at an annualized rate) in the third quarter relative to the previous quarter (top chart). Despite the modest sequential deceleration in Q3, the U.K. economy continues to grow at a still-encouraging rate, although there are clear headwinds ahead.While a breakdown of the GDP data into its underlying demand components will not be available until mid-November, monthly data give us an idea of what exactly is going on in the U.K. economy. Growth in real consumer spending on goods downshifted from 1.5 percent (not annualized) in Q2 to 0.3 percent in Q3. Weaker spending growth may reflect lackluster growth in average hourly earnings. Growth in employment has slipped a bit recently but generally remains solid, up 46,000 in August. In addition, consumer confidence has edged lower recently, which may reflect concerns over growth in the Eurozone and geopolitical tensions in the middle east and Russia/Ukraine.
Speaking of slower growth abroad, the value of British exports has trended lower in recent months. Slower growth in some major foreign economies may help to explain the pullback in the manufacturing PMI to 51.6 in September.
Growth Falls Short of BoE Forecast
The Bank of England was looking for a 0.9 percent quarter-over-quarter increase in Q3, and the 0.7 percent gain estimated by the advance release fell a bit short of this expectation. Renewed concerns about the health of the global economy, specifically in the Eurozone (the U.K.’s largest trading partner), and persistent geopolitical tensions may begin to change the outlook for the Monetary Policy Committee (MPC). With inflation remaining below the MPC’s 2 percent target (the year-over-year rate of CPI inflation was only 1.2 percent in September), the MPC could be on hold longer than initially thought, even as the economy continues to grow above its long-run potential rate that some analysts estimate to be around 2 percent per annum or so.That said, we expect growth to remain relatively firm in the coming quarters, despite easing from the current 3.0 percent annualized pace. With regard to monetary policy, we still see the Bank of England commencing a tightening cycle in the first half of next year, barring further unforeseen shocks in the global economy. While the pound has fallen against the greenback recently, we expect to see some appreciation in the near-term, especially if the BoE does indeed act prior to the Fed, as we currently expect.
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