UK: Only temporary dip in growth? - ING

According to James Smith, Developed Markets Economist at ING, prospects of a summer rate hike from BoE depends upon the fact that whether the first quarter slowdown of UK economy was simply a temporary dip.

Key Quotes

“This is essentially the question that The BoE’s view is that the decline in growth is unlikely to last, and in fact that the particularly weak GDP figure will probably get revised upwards.”

“It certainly appears likely that some of the dip was down to the snow. Construction on its own knocked 0.2ppts off first-quarter growth, which is unusually large for a sector that only makes up 6% of the overall economy. Assuming the PMIs and importantly, second quarter growth bounces back, we suspect the Bank may feel comfortable enough to hike rates in August.”

“That said, a lot still depends on the high street. Pressured real incomes, falling borrowing and depressed confidence, have only added to retailer’s woes over recent months. Shop owners have faced the ‘perfect storm’ of lower demand, higher minimum wage costs and rising business rates, and by some measures, the first quarter was the worst three months since the crisis.”

“Many retailers have become highly leveraged in the post-crisis years, so if we were to see an increased number of big names entering difficulties over the next couple of months, the Bank might well judge a rate hike to be one headwind too many for the sector.”