Weaker-Than-Expected U.K. GDP Growth in Q4

The U.K. economy grew 0.5 percent on a sequential basis in the fourth quarter, falling just shy of consensus expectations for 0.6 percent. Weakness in construction and industrial output was offset by the service sector. 

Consumer in the Driver Seat for U.K. Economy

Data released this morning showed that real GDP in the United Kingdom rose 0.5 percent (2.0 percent at an annualized rate) in the fourth quarter relative to the previous quarter (top chart). The outturn was a bit weaker than the 0.6 percent sequential growth rate that the consensus forecast had anticipated. Nevertheless, consistently solid growth over the past four quarters left the level of real GDP 2.7 percent higher on a year-ago basis, the strongest year-over-year rate of real GDP growth in 7 years.
A full breakdown of the GDP data into its underlying demand components will not be available until next month. However, preliminary data show that weakness was concentrated in the construction sector, which contracted 1.8 percent (not annualized) and in the industrial sector, which edged 0.1 percent lower. The weakness in industrial output may be related, at least in part, to the external sector as monthly data shows that the value of exports grew only 0.6 percent (not annualized) in the first two months of Q4 relative to the same time period in Q3. Output in the service sector, which was up 0.8 percent on a sequential basis in Q4, drove the overall rate of real GDP growth once again. In that regard, monthly data show that real retail spending was up 2.2 percent (not annualized) in Q4, the strongest sequential reading since Q1-2001.

Will the Bank of England Hike Rates This Year?

Despite GDP growth remaining firm, especially relative to other European economies, CPI inflation has continued to trend downward. Indeed, headline CPI inflation has fallen well-below the Bank of England’s (BoE) 2.0 percent target rate, reaching 0.5 percent on a year-over-year basis in December (middle chart). The collapse in energy prices has helped to drive this decline in the overall rate of CPI inflation. However, “core” (excluding food and energy) inflation has been receding as well. Although the central bank may be able to look through a drop in headline inflation, as it is essentially an oil price story, the fall in core prices may play a larger factor in its thinking regarding rate hikes going forward.

The drop in CPI inflation may prove to be temporary, as average weekly earnings are beginning to pick up (bottom chart). This may provide some relief to falling inflation over the medium-term, especially if we are to see stabilization in oil prices. The unemployment rate has also fallen to 5.8 percent, the lowest rate since 2008, providing support for a potential rate hike this year. Our current expectation is for the BoE to hike rates in August 2015. However, if CPI inflation continues to trend downward, especially the core measure, we see potential for a delay until the end of the year or even into 2016, depending on other global and domestic economic factors.