‘Notable slowdown’ in UK economy in 12 months after Brexit vote

Sterling falls as growth in the second quarter was weaker than expected

Sterling fell after the UK’s Office for National Statistics published weaker than expected second-quarter GDP growth. Photograph: Chris Ratcliffe/Bloomberg

Sterling fell after the UK’s Office for National Statistics published weaker than expected second-quarter GDP growth. Photograph: Chris Ratcliffe/Bloomberg

 

The UK economy grew at its slowest pace since 2013 in the 12 months after last year’s Brexit vote, data showed on Friday, painting a subdued picture as the Bank of England prepares to raise interest rates for the first time in a decade.

The world’s fifth-biggest economy was just 1.5 per cent bigger than a year earlier in the second quarter, the weakest year-on-year expansion in more than four years and down from a rate of 1.8 per cent in the first three months of the year.

The second-quarter growth rate was also weaker than had been expected. The UK’s Office for National Statistics had previously estimated growth for the period at 1.7 per cent.

“There was a notable slowdown in growth in the first half of 2017,” said ONS head of GDP Darren Morgan.

“The often buoyant service sector was the only area to grow in the second quarter, mainly due to increases in computer programming and retail.”

Friday’s data also showed a monthly fall in output for the services sector in July, however, boding poorly for third-quarter growth.

Sterling fell after the data and prompted some economists to reconsider their prediction of a rate hike at the end of the Bank of England’s next meeting on November 2nd.

“I’m sticking to my call for a hike in November, but I’m much more nervous now than I was prior to this data release,” Scotiabank’s Alan Clarke wrote in a note to clients.

However, the weak data might not stand in the way of the Bank of England raising interest rates from their record low 0.25 per cent. The bank’s governor Mark Carney said on Friday the economy was on track for a rate increase “in the relatively near term”, two weeks after the Bank of England jolted markets by flagging a rate rise “in the coming months,” despite weak growth this year.

The bank has downgraded its estimate of how fast Britain’s economy can grow without generating excess inflation because of the impact of Brexit, so Friday’s weaker growth picture is not necessarily fatal for the chances of a November rate rise.

A major annual set of revisions of Britain’s official data showed show stronger business investment, net exports and household savings, but also a larger current account deficit.

Britain sucked in £23.2 billion ($31.0 billion) of foreign finance in the three months to June, far above economists’ £16 billion forecast, and the first-quarter deficit was revised up to £22.3 billion from £16.9 billion.

Business investment grew by an annual 2.5 per cent in the second quarter, compared with an earlier estimate that it had stagnated, and households’ savings ratio was a relatively healthy 5.4 per cent in the second quarter.

Net exports contributed 0.4 percentage points to quarterly growth, compared with earlier estimates of zero, and an inflationary squeeze on consumers may be easing, with real household disposable income up 1.6 per cent in the latest quarter, the most since 2015.

Nonetheless, the broader picture remains one of consumers under pressure from a steep rise in inflation caused by the fall in the pound since last year’s Brexit vote. Disposable income has fallen year-on-year for the last four quarters, the longest period since 2011.

Overall quarterly GDP growth was unrevised at 0.3 per cent, and the services sector - which makes up 80 per cent on the economy - contracted by 0.2 per cent in July.

Separately, mortgage lender Nationwide said house prices - a bellwether for consumer demand - rose at their slowest rate in four years this month, and the Bank of England said mortgage approvals fell in August.

“It would be unprecedented for the central bank to tighten policy with the data pointing to such anaemic economic growth,” Chris Williamson, chief economist at financial data company IHS Markit, said.

“However, policymakers continue to fuel expectations that interest rates will rise soon in response to higher-than-expected inflation,” he said.

- (Reuters / Press Association)