Slower growth in UK GDP raises rate hike doubts

The UK economy grew slower than previously thought in the final quarter of 2017, prompting some economists to question whether the Bank of England would go ahead with an interest rate rise expected in May.

Services sector continues to grow

The Office for National Statistics (ONS) revised down GDP growth in the final three months of the year from its initial estimate of 0.5 per cent to 0.4 per cent, mainly due to slower-than-expected growth in manufacturing and a faltering construction sector. For 2017 as a whole, the economy expanded by 1.7 per cent, slightly lower than previously thought and the weakest growth since 2012.The services sector, which accounts for more than three-quarter of Britain’s GDP, grew at a healthy 0.6 per cent in the final quarter, driven by growth in business and financial services. At the other end of the scale, construction output dropped by 0.7 per cent.

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The question of interest rates

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the figures might indicate that the Bank of England would back away from an early rates rise.“This is not an economy that needs cooling with higher interest rates,” he said. “The downward revision to Q4 GDP puts the UK back at the bottom of the G7 growth leader board for 2017.“The economy still appears to have gathered a little momentum in the second half of last year. All told, then, the latest GDP data suggest that the economy remains in a fragile state and does not need to be cooled with another rate rise as soon as May.”

UK economic progress continues slowly

John Hawksworth, chief economist at PwC, said the data indicated the UK economy would continue to lag behind most other G7 nations this year.“The big picture has not changed. The UK economy is still estimated to have slowed markedly in the first half of 2017 as higher inflation – linked primarily to the weaker pound after the Brexit vote – dampened real household spending power,” he said.“This factor continued to dampen consumer spending growth in the second half of 2017, but was offset by a stronger world economy, which boosted UK exports in areas like manufacturing and financial and business services. Government spending also provided some support as the Chancellor eased off on austerity, particularly as regards public investment. “As a result of these factors, UK growth picked up to around 0.4-0.5 per cent per quarter in the second half of 2017 from only around 0.2-0.3 per cent in the first half. But there are signs that growth may have eased off again in January, so we expect UK growth to remain relatively modest at around 1.5 per cent in 2018 as a whole.“This would not be disastrous by any means, but would place us towards the bottom of the G7 growth league table together with Italy and Japan, rather than at the top with Germany and the US.”Robert Gordon, CEO of Hitachi Capital UK, expressed disappointment that UK business investment was flat in the last quarter of 2017. “We would like to see businesses taking a more proactive approach to tackling productivity and driving growth through positive investment in key assets over the next few months,” he said.

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Read more about UK business in the Winter issue of our magazine 

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