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UK economic growth slowed in fourth quarter

UK economic growth slowed in the final quarter of last year as car manufacturing declined at its steepest rate in just under a decade.

Gross domestic product (GDP) growth fell to 0.2% between October and December, according to the Office for National Statistics (ONS).

This compares to 0.6% growth in the previous quarter, when warm weather and the World Cup contributed to a boost in economic activity.

Meanwhile, annual GDP increased by 1.4%, the weakest it has been since 2009.

Sterling tumbled following the news, dropping 0.4% versus the US dollar to 1.28. Against the euro, the pound was down 0.1% at 1.14.

But Prime Minister Theresa May’s official spokesman said: “The UK economy continues to grow and remains fundamentally strong.”

Car production was down 4.9% in the period, marking the biggest decline since the first quarter of 2009.

Total production output slipped by 1.1%, the largest decline since the end of 2012. This included a 0.9% dip in manufacturing.

Construction was also lower, dropping 0.3% in the fourth quarter. This follows two consecutive quarters of growth during the summer, when companies caught up with work delayed by adverse weather early in the year.

Although services output was up, growth slowed to 0.4% following a relatively strong performance during the summer.

UK economic growth
(PA Graphics)

The ONS said it reflected a slowdown across a number of industries, as Brexit-related concerns weighed on business-to-business spending at the end of 2018.

Speaking about the impact of a potential no-deal Brexit on the economy, Chancellor Philip Hammond told ITV: “Business is challenged, I accept that, but we can’t convey information that we don’t have. We don’t know how some of our partners on the other side of the channel will behave in the event of no-deal Brexit.

“My judgement is that we are likely to get the (Prime Minister’s) deal through Parliament but I can’t be 100% certain, and that is why we are doing the contingency planning we are doing. Once businesses have clarity, they will invest again.

“No deal would be a very bad outcome for economy,”

Rob Kent-Smith, head of GDP at the ONS, said: “GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow with the health sector, management consultants and IT all doing well.

“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy.”

Compared with the same quarter in 2017, the UK economy is estimated to have grown by 1.3%, the weakest in six years. It was last weaker in the second quarter of 2012.

On a month-to-month basis, GDP fell 0.4% in December. This was the biggest monthly drop since March 2016.

Howard Archer, chief economic adviser at EY Item Club, said the figures were “disappointing”.

“The UK economy clearly changed down into a much lower gear in the latter months of 2018 as heightened economic, political and Brexit uncertainties fuelled business caution in particular,” he said. “There are also signs of consumers becoming more cautious despite a pick-up in their purchasing power.”

Samuel Tombs of Pantheon Macroeconomics warned against interpreting the data as evidence of an impending recession.

He said: “On the face of it, the sharp fall in GDP in December looks alarming, but it isn’t unprecedented — it also fell by 0.4% in March 2016 — and it was driven by sectors which have historically been volatile.”

Separately, the ONS data dump showed that Britain’s total trade deficit widened slightly in the last three months of the year by £900 million to £10.4 billion, due to a rise in goods imports including cars and chemicals.

Source: BT

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Disappointing end to 2018 for UK economy could be confirmed this week

A disappointing end to 2018 for the UK economy could be confirmed by official GDP figures later this week, analysts have warned.

Last week the closely-followed IHS Markit/ CIPS Purchasing Managers’ Index (PMI) revealed a three-month low in UK construction sector activity in December and a 29-month low in job creation in the services sector.

But the manufacturing sector posted a near-record increase in stock holdings in December.

Economists predicted a 0.1 per cent rise in GDP for November, when the Office for National Statistics release figures on Friday – it would leave the UK on track for the lowest GDP rise since 2009.

“We think that a repeat of the previous month’s modest 0.1% expansion in the size of the economy is likely,” Martin Beck, analyst at Oxford Economics, said.

Beck added that while a composite measure of PMIs in November dropped to the lowest level since July 2016, it would be offset by a strong performance in the retail sector and upbeat industrial data for the month.

The research firm also expected GDP to rise 0.3 per cent in the fourth quarter to leave 1.4 annual growth – the lowest since 2009.

Daiwa Capital Markets also said last week’s PMI data implied “minimal growth” in the final quarter of the year and predicted GDP growth of 0.1 per cent in November, unchanged from October, but on track for a “sharp slowdown” from the 0.6 per cent growth in the third quarter.

The investment bank’s analysts also expected manufacturing and construction output to be stronger for November than the previous month but a slowdown in services activity.

They said: “The manufacturing and construction PMIs, released the past couple of days, provided a mixed picture of business sentiment at the end of the year.

On the whole, however, we took a downbeat message from them, not least as the boost to manufacturing activity mainly reflected stock building ahead of a possible no-deal Brexit.”

Source: City A.M.

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UK economy grows but business investment falls for third consecutive quarter

The UK economy grew at its fastest rate in almost two years in the three months to September but business investment fell for the third consecutive quarter.

GDP grew by 0.6 per cent in the third quarter, the Office for National Statistics said today, confirming its initial estimate last month.

But the longer term picture remain “subdued” it said, with business investment dropping 1.1 per cent to £46.9bn.

It is the first time investment has dropped over three consecutive quarters since the economic downturn of 2008 to 2009.

The UK’s current account deficit widened by £6.6bn to £25bn (4.6 per cent of GDP) in the three months to the end of September – the largest deficit since the third quarter of 2016.

The widening was down to increased profits from British companies flowing to foreign investors.

EY Item Club economist Howard Archer said: “The further, marked rise in the current account deficit is disappointing as an elevated shortfall is a potential source of vulnerability for the UK economy – particularly if there was any major loss of investor confidence in the UK for any reason such as Brexit concerns.”

ONS figures also showed that borrowing in November was £7.2bn, the lowest November borrowing for 14 years and £900m less than the same month last year.

GDP growth was led by the services sector, while construction and manufacturing also contributed to the growth.

Household spending also increased 0.5 per cent, the eighth consecutive quarters in which households have spent more than they received.

Head of national accounts at the ONS Rob Kent-Smith said: “Today’s figures confirm the economy picked up in the third quarter with a solid showing from services and construction.

“However, the longer-term picture remains subdued and business investment has now fallen for three consecutive quarters.

“Households continued to spend more than they received, for an unprecedented eight quarters in a row.”

Source: City AM

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UK debt to soar to financial crisis levels over next five years

UK debt could rise to £6.7 trillion by 2023, from £5.1 trillion in 2017, according to new research.

The UK’s debt as a percentage of gross domestic product (GDP) is predicted to rise to nearly 260 per cent of GDP, a level not seen since the financial crisis.

The debt increase is expected to largely come from increased borrowing by companies and households, which are both predicted to borrow at a faster rate than economic growth, the analysis from accountancy firm PwC said.

The government is likely to reduce the size of its debt relative to GDP over the next five years, but even so, the net effect is set to be a gradual rise in the economy’s debt-to-GDP ratio from 252 per cent in 2017 to just under 260 per cent in 2023.

Total debt repayments could rise from a little above £150bn in 2017 to around £250bn by 2023 if interest rates rise two per cent.

Low income households could be hit particularly hard due to rising debt interest payments.

Chief economist at PwC John Hawksworth said: “While the financial crisis led to the private sector deleveraging, we’ve seen a change in behaviour among households and non-financial companies since 2015, when they began to accumulate debt at a faster rate than nominal GDP growth.

“The unusual amount of uncertainty facing the UK economy in 2018-19 due to Brexit, London’s stumbling housing market and the likelihood of further interest rate increases, means a pause in debt accumulation relative to GDP is possible in the short term.

“But if a smooth Brexit transition is agreed with the EU and UK business and consumer confidence recovers, the private sector is likely to resume faster rates of borrowing that could cause the debt stock to rise further relative to GDP.”

Source: City A.M.

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UK economy heading for worst year since crash, say economists

The British economy is heading for its worst year in almost a decade amid the growing risks from no-deal Brexit , according to a leading economic forecaster.

After official figures revealed zero growth in GDP in August, the EY Item Club said the economy would struggle to recover in the final months of the year owing to the increasing likelihood of Britain crashing out of the EU in less than six months time.

The group of economists, which is the only non-government forecasting organisation to use the Treasury modelling of the economy, said it had downgraded its growth forecast for this year and next as a consequence.

It forecast growth of 1.3% for the whole of 2018, down from a previous estimate of 1.4%. This would be the worst annual period for growth since the financial crisis. It also downgraded the outlook for the second quarter running.

EY Item Club forecast a modest recovery next year if there was a smooth Brexit deal, with growth of 1.5%, down from its previous estimate of 1.6%.
Economists have said failure to reach such a deal could significantly harm the UK economy, with the International Monetary Fund warning of “dire consequences” for growth.

The government’s economic forecaster, the Office for Budget Responsibility , last week raised the prospect of a no-deal scenario triggering border delays, companies and consumers stockpiling food and other supplies, and aircraft being unable to fly in and out of Britain.

The Item Club said Brexit uncertainties were influencing business investment decisions, but added that efforts to find alternative suppliers in the UK rather than the EU may lead to an increase in spending.

It also said weaker growth in the eurozone had sapped appetite for exports, as the world economy digests the impact of US import tariffs that have already begun to drag on economic activity.

Inflation is forecast to fall from about 2.7% to 2.3% by the end of the year, above the Bank of England’s target rate.

Consumer spending growth is estimated to remain limited as a consequence, as UK households remain under pressure from weak wage growth and relatively high levels of inflation.

Howard Archer, the chief economic adviser to the Item Club, said: “Heightened uncertainties in the run-up to and the aftermath of the UK’s exit could fuel business and consumer caution. This is a significant factor leading us to trim our GDP forecasts for 2018 and 2019.

“Should the UK leave the EU in March 2019 without any deal, the near-term growth outlook could be significantly weaker.”

Source: Gooruf

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GDP data shows mixed messages for UK economy

The UK economy grew faster than expected over the summer but appears to have juddered to a halt in August.

Data from the Office for National Statistics (ONS) released this morning, showed the economy grew by 0.7 per cent in the three months to the end of August.

Growth for June and July had been revised upward, but in August the first estimates suggest the economy did not grow at all.

Ben Brettell, senior economist at Hargreaves Lansdown, said the quarterly figure was better than expected but the data for August was a cause for concern.

He said: “Worryingly the dominant service sector has experienced a significant slowdown in growth over the past year or so, with an emerging trend for growth of around 1.5 per cent year on year.”

The ONS data came as the International Monetary Fund (IMF) revised downwards its projection for UK growth in 2018 to 1.1 per cent, having previously forecast it would be 1.3 per cent.

The IMF warned the UK’s public finances were among the worst in the world and, after compiling what was essentially a balance sheet for the UK economy,  said that on this basis the UK government had a negative net worth of more than £2trn.

Mr Brettell said: “Overall though the picture is still one of muddling through. Strong growth over the summer is likely to reassure policymakers that the recent interest rate rise was warranted, but they’ll be hoping to see the momentum maintained as Brexit approaches.

“Markets are still pencilling in a further rise around the middle of next year – though clearly a disorderly Brexit would pose a significant risk to that outlook.”

Jacob Dieppe, head of trading at Infinox, said: “The economy hasn’t given up the fight but it’s by no means firing on all cylinders. It’s somewhere in between and that will add to the uncertainty surrounding our exit from the EU.

“Optimists will see the August flatline as mere seasonal fall-out, cynics will see it as symbolic of a deeper malaise. What few will deny is that the disproportionate contribution of the services sector leaves the UK very exposed in the event of a fractious Brexit.

“If consumers sit tight, the rate of growth could quickly contract, all the more so if the Pound weakens further and drives up inflation.”

Source: FT Adviser

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Bill Jamieson: Continent counts the cost of ‘no-deal’ Brexit

Business pressure is growing on the UK to reach a deal with the EU on Brexit. From farmers to manufacturers, healthcare companies to banks and financial companies and SMEs to the behemoths of the CBI, the clamour is growing for the UK government to avoid a “no deal” outcome. All this is unfolding against the background of a sluggish performance by the UK economy and concerns over the lack of economic momentum –much of this blamed on the uncertainty caused by the relentless, debilitating lack of progress in securing a withdrawal deal.

Now Chancellor Philip Hammond has further racked up the pressure by repeating the findings of the Treasury’s provisional Brexit analysis earlier this year that a no-deal Brexit could mean a 7.7 per cent hit to GDP over the next 15 years, compared with the “status quo baseline”. He said that under a no-deal scenario chemicals, food and drink, clothing, manufacturing, cars and retail would be the sectors “most affected negatively in the long run”.

Let’s set aside the row over whether this is just a Remain-supporting chancellor regurgitating the earlier warnings of “Project Fear” which failed to materialise. We have much to be concerned about. And it adds to the sense that Michel Barnier and the European Commission negotiating team have nothing to lose by holding out and pushing the UK to the brink – and beyond. But we should also look more closely at what is at stake within the EU itself. For Brussels is under equal and equivalent pressure to agree a withdrawal deal.

The Eurozone economies, too, need to secure an agreement that minimises disruption to continental trade with the UK and wider negative effects. It’s generally assumed that the UK is the economic laggard, and that the EU, underpinned by the Single Market and the customs union, is enjoying a superior rate of economic growth and rising exports. But the latest figures suggest otherwise.

Eurozone economic growth slowed further in the second quarter of this year. Eurostat estimates that gross domestic product in the 19 countries sharing the euro, far from growing faster than the UK, is trailing our performance. It is grew by 0.3 per cent quarter-on-quarter in the April-June period, not only below analysts’ expectations but also slightly behind the 0.4 per cent growth recorded for the UK over this period.

The UK’s improvement on the first three months of the year has been attributed to the spell of warmer weather – though the Eurozone countries also enjoyed more clement conditions after the freeze of the opening months. Bert Colijn, a senior economist at ING Bank, said: “Trade uncertainty seems to have already had a significant effect on the Eurozone economy in Q2…

With lower confidence among businesses and consumers, concerns have likely translated into somewhat weaker domestic demand growth. In an economy in which capacity constraints abound and credit conditions remain favourable, confidence is the likely factor keeping investment down.” The Eurozone’s second quarter slowdown follows a sharp deceleration in the first three months of the year.

The combination of a slower global recovery and strong euro caused exports to plunge in the three months to March, with GDP growth falling from 0.7 per cent in the fourth quarter of 2107 to 0.4 per cent. Industrial production shrank in April and economic sentiment fell throughout the quarter. A stronger euro has taken a bite out of export growth, while rising inflation has been weighing on household spending – all too familiar here.

The euro area is also having to contend with political uncertainties – a fragile populist coalition in Italy, continuing turbulence in Spain, evidence of growing disenchantment with President Emmanuel Macron in France, while in Germany, Chancellor Angela Merkel has been under pressure from her coalition partners. Meanwhile, tensions with the United States, the Eurozone’s largest trading partner, are high following tit-for-tat tariffs implemented in June.

According to FocusEconomics, five Euro economies, including major players France and Germany, have had their growth prospects cut. Cyprus, Estonia, Greece and Luxembourg were the only economies to see higher GDP growth forecasts, while Belgium, France and Italy will be the slowest growing – all expanding below two per cent. Germany is forecast to grow by 2.1 per cent this year.

Latest data from France suggests the economy expanded modestly in the second quarter, while industrial production contracted for the third consecutive month in May – the fourth monthly decline so far this year. In addition, consumer confidence dropped to a near two-year low in June amid mounting unemployment fears. Consumers are growing more fearful that the economic recovery is running out of steam.

In Italy recent industrial output figures in April and May, and the average of PMI readings throughout the quarter point to a slowdown. Consumer spending also seems to have cooled, as retail sales contracted heavily in April and rebounded timidly the following month. If, as seems likely, world trade continues to slow as US tariffs continue to bite and President Donald Trump threatens more, the Eurozone’s leading companies will be anxious not to have their prospects further damaged by a “no deal” UK exit with all that this means for companies exporting to the UK.

Exports from the EU to the UK totalled £341 billion last year, with a surplus vis-à-vis the UK of £67bn. While the UK enjoyed a £28bn surplus on trade in services, this was outweighed by a deficit of £95bn in goods. Two EU export sectors look particularly exposed: cars and food products. German car makers have long warned that Brexit would hit their exports to Britain and disrupt international supply chains.

About a fifth of all cars produced in Germany are exported to the UK, making it the single biggest destination by volume. As for food and non-alcoholic drink imports from the EU, these are running at £24bn a year – trade which EU suppliers will be acutely anxious to protect. As the clock ticks on, I see intensifying pressure from business on both sides for a deal to be reached – and preferably with the minimum of delay.

Source: Scotsman

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Bank of England’s latest rate hike under microscope after UK GDP data released

The rebound in second-quarter UK growth was in line with Bank of England forecasts, but economists have raised questions over whether last week’s rate hike was justified.

While figures showed GDP rising 0.4%, economic expansion appeared to sputter in the final month of the quarter, growing just 0.1% in June.

“The second-quarter rebound was in line with expectations from the Bank of England, which raised interest rates for the second time in ten months at its August meeting,” said Chris Williamson, chief business economist at IHS Markit.

“Barring surprises, the Bank sees the economy growing at a steady 0.4% rate in coming quarters, but there are already signs that the third quarter has started on a softer footing,” he added.

He noted that recent purchasing managers’ index (PMI) readings covering the services, manufacturing and construction sectors are pointing to third quarter growth of just 0.3%.

“Not only did the PMI lose ground in July, but recent inflation indicators have fallen, hence fueling criticism that it may have been more appropriate to postpone a rate hike when genuine signs of the economy strengthening had appeared, rather than just a rebound from extreme weather,” he said.

But Howard Archer, chief economic adviser to the EY Item Club, said the reading “will likely be of considerable relief to the Bank of England”, as a weaker outcome would have fuelled criticism of the rate-setting Monetary Policy Committee (MPC).

“The Bank of England will likely see confirmation the economy grew 0.4% quarter on quarter and is back growing essentially in line with its perceived supply-side annual potential growth rate of 1.5% as consistent with its decision to raise interest rates from 0.50% to 0.75%.”

Mr Archer expects the Bank to wait until after the Brexit deadline of March 2019 to hike rates further, “given the major uncertainties that may occur in the run-up to the UK’s departure”.

The Bank of England currently expects full-year growth for 2018 to come in at 1.4%, rising to 1.8% in 2019.

“We expect the Bank of England to next raise interest rates from 0.75% to 1.00% in May 2019,” Mr Archer said.

“We would not rule out a second 25 basis points interest rate hike towards the end of 2019 as the Bank of England looks to gradually normalise monetary policy.

“However, the growth and interest rate forecasts could be blown out of the water if the UK leaves the EU next March with no deal.”

Source: BT.com

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A ‘no deal’ Brexit would cost UK economy dear, warns think tank

A “no deal” Brexit scenario would cost the UK economy at least around £800 per person in lost output each year, a think-tank has warned.

The National Institute of Economic and Social Research (Niesr) also estimates the cost to the economy of the UK crashing out of the EU could double the lost output if the impact on productivity is also taken into account.

It said the Bank of England will likely “weigh the consequences of ‘getting it wrong’” ahead of Thursday’s vote on whether to raise interest rates to the highest level for more than nine years amid uncertainty over a Brexit deal.

In our view, the Government will have to make significant concessions to the EU.

Niesr

Niesr predicts a hefty blow to the economy if the Government’s “more restrictive” White Paper proposals on Brexit are achieved – amounting to £500 per person in lost output per year over time, compared with the soft Brexit scenario.

But it said this would rise to £800 per person in the event of a “no deal” Brexit.

“These estimates do not include the likely impact on productivity which could, on some estimates, double the size of the losses,” it said.

In its latest set of predictions for the economy, Niesr said the Bank of England should only raise rates gradually and “stand ready to move in either direction should circumstances change”.

“The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions,” according to Niesr.

It is forecasting UK growth of 1.4% this year and 1.7% next year – broadly in line with its previous forecasts.

The predictions assume a “soft Brexit” scenario – where the UK achieves close to full access to the EU market for goods and services – and an increase in rates from 0.5% to 0.75% on Thursday decision, with rates hitting 1.25% in 2019.

Though it stressed the risks are heavily skewed to the downside.

Niesr said: “The UK economy is facing an unusual level of uncertainty because of Brexit.”

“The UK government’s White Paper, which set out its preferences for that new relationship, has failed to unite the Government or Parliament, leaving open an entire spectrum of possible outcomes,” it added.

Niesr also warned the Government would have to make “significant concessions” to the EU for its White Paper proposals put forward last month to succeed.

On spending, it said pressure to increase funding for the NHS and public sector workers will fail to see government spending as a share of GDP fall, in contrast to forecasts by the Office for Budget Responsibility (OBR).

The Budget deficit will therefore remain close to 2% of GDP over the next five years instead of the OBR’s forecast of 1%, according to Niesr.

Source: BT.com

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UK economic growth revised up in first quarter

UK economic growth has been revised up to 0.2% in the first quarter, as output from Britain’s construction sector came in higher than previously estimated.

Earlier readings of GDP by the Office for National Statistics (ONS) showed the economy grew just 0.1% – which would have been the slowest pace of growth in five years.

While the final reading means growth still halved from 0.4% in the final quarter of 2017, the slightly better measurement is likely to raise the prospect of a near-term interest rate hike by the Bank of England.

The ONS raised the figure in its final estimate after a notable upward revision in construction output, which mainly reflects improvements to the way the sector’s work is measured.

ONS head of GDP Rob Kent-Smith said: “GDP growth was revised up slightly in the first three months of 2018, with later construction data, and significantly improved methods for measuring the sector, nudging up growth.

“These improved methods, introduced as part of ONS’s annual update to its figures, will lead to better early estimates of the construction sector with smaller revisions in the future.”

Sterling rose against the US dollar in the wake of the data’s release (PA)

The pound spiked in the wake of the data, rising 0.7% against the US dollar to trade at 1.317. Versus the euro, sterling was nearly flat, at 1.130.

Construction output growth was revised up by 1.9 percentage points over the quarter to negative 0.8%, while production output was revised down by 0.2 percentage points to 0.4%.

Services sector growth was unrevised at 0.3%.

The ONS reiterated that the overall impact of extreme wintry weather caused by the Beast from the East on output in the first quarter “appears to be relatively small.”

The Bank of England’s Monetary Policy Committee (MPC) now be watched closely for hints that an interest rate rise may be pushed through sooner rather later, with some voting members having previously held off following the sharp slowdown in growth.

Howard Archer, chief economic advisor at EY ITEM Club, said the upward revision to GDP, as well as the recent evidence of a pick-up in retail sales in the second quarter, “fuels our belief that the MPC is more likely than not to hike interest rates from 0.50% to 0.75% at their August meeting.”

“There is likely to be only one interest rate hike in 2018, leaving interest rates at 0.75% at the end of the year.

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“We expect the Bank of England to raise interest rates twice in 2019 taking them up to 1.25% as it looks to gradually normalise monetary policy.”

Other ONS data showed the squeeze on living costs triggered by the collapse in the pound following the Brexit vote is easing.

Real household disposable income in the first quarter increased by 0.3% quarter on quarter, as wages increased at a faster rate than price rises.

It represents the second consecutive quarter of positive growth following over a year of negative growth.

However, the household saving ratio fell 0.4% to 4.1% as spending grew faster than income, the third-lowest quarterly saving ratio since records began in 1963.

Business investment was estimated to have fallen by 0.4% to £47.7 billion between the fourth and first quarter

The UK’s current account deficit was came in £17.7 billion, below forecasts of £18 billion, a narrowing of £1.8 billion from a revised deficit of £19.5 billion in the previous period.

Source: BT.com