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UK-GDP-GROWTH
UK GDP growth bounces back, pointing towards bank rate rises over coming
12 months
LONDON, Aug. 12, 2018 (BSS/Xinhua) – The UK GDP growth rate doubled in the
second quarter, providing firm support for the Bank of England’s (BoE) rate-
rise earlier this month.
Quarter-on-quarter growth was 0.4 percent for the second quarter, double
the 0.2 percent growth in the first quarter of the year.
First quarter figures had slumped to 0.2 percent after a run of quarters
at 0.4 percent growth, affected by bad weather.
New figures from the official statistics body the Office of National
Statistics (ONS) showed that there has been some unwinding of the impact of
bad weather in affected industries. The pick-up in Q2 was also boosted by
consumers taking advantage of the warm weather and the football World Cup
celebrations.
Despite a sharp pick-up in retail sales volumes in Q2, quarterly consumer
spending growth rose by just 0.3 percent, suggesting that spending off the
high street remained subdued.
The services industries and construction increased by 0.5 percent and 0.9
percent respectively, while production decreased by 0.8 percent.
Business investment increased by 0.5 percent over the quarter.
MONETARY POLICY DECISIONS SUPPORTED
Economists had speculated at the time of the first quarter figures that
the stumble in growth was a warning of a general downturn in the economy, and
the lower figures would be maintained in later quarters.
The conclusion reached by most economists was that the downturn was a
downward blip in data, a view shared by the central bank the BoE.
At the beginning of this month the BoE raised the bank rate for only the
second time in 11 years, taking it to 0.75 percent, and part of its reasoning
was that the poor first quarter figures were an exception largely caused by
poor weather.
Friday’s figures have backed the bank’s assumption.
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“The BoE will be reassured by the GDP growth figure. Growth of 0.4 percent
is what they were expecting, they would have worried had it turned out to be
weaker than that,” Dr. Garry Young, director of macroeconomic forecasting at
the National Institute of Economic and Social Research (NIESR), said on
Friday afternoon.
The NIESR, an independent London-based economic think-tank, released its
own GDP forecast figures on Friday afternoon, which detailed growth rising
slightly from the official Q2 figure of 0.4 percent to 0.5 percent.
Growth is close to the potential, according to the NIESR, and there is
some evidence that services sector output has stabilized while the relatively
small construction sector continues to gather momentum.
The NIESR survey noted that the manufacturing and construction sectors are
recovering after a particularly weak start to the year. The dominant services
sector, accounting for 80 percent of the economy, is set to maintain a
similar rate of growth from the second into the third quarter.
“Growth in the second quarter will continue in the third quarter. Weakness
in March and April was to do with the weather but figures since then have
been fairly promising and I think we can be confident that soft patch is
past,” said Young.
“Q1 weakness and in the monthly data in April is now past and May and June
figures are much more reassuring. I would expect something close to 0.5
percent for the third quarter.”
RATE RISES EXPECTED OVER COMING YEAR
The BoE governor Mark Carney said at the time of the rate rise at the
beginning of this month that the Bank expected there to be three rate rises
over the coming three years.
The Q2 GDP figures do nothing to undermine this direction of policy.
But the question mark hanging over future policy is Brexit, the direction
of which is not yet certain.
Carney made clear that it was possible the bank could cut interest rates
in the event of a Brexit which posed a threat to the economy.
Young said: “We are on track for more rate rises next year.
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“The difficulty is that early next year is around the time of Britain
leaving the European Union (EU) which would make it difficult for the Bank to
increase in rates in February if there is not an agreed deal by then,” Young
said.
The expert continued “I would have thought that it might mean that there
would be a good chance of a rate rise in May if everything goes smoothly with
Brexit.”
“If it goes smoothly I expect another rate rise in February, otherwise I
think it would be afterwards.”
As for the rise, Young said they expect rate rises of 25 basis points for
the next year or so, “and the data released today is consistent with that.”
TRADE DEFICIT WORRIES
Other data also released by the ONS on Friday showed that the trade
deficit widened by 4.7 billion pounds (about 6 billion U.S. dollars) in Q2,
with net trade dragging on GDP growth as a result.
This reflects a sharp fall in volumes of exports, down 3.6 percent
quarter-on-quarter. Car exports to non-EU countries, especially the U.S.,
have fallen sharply.
Net trade exerted a large 0.8 percentage points drag on growth, as export
volumes dropped by 3.6 percent on the quarter, primarily driven by a fall in
car and plane exports to non-EU countries, while import volumes fell by a
smaller 0.8 percent.
Excluding the volatile valuables component (mostly non-monetary gold), net
trade still subtracted 0.5 percentage from GDP. “The widening of the UK’s
trade deficit in the quarter is disappointing, and reflects both a decline in
goods exports and a rise in imported goods,” said Suren Thiru, head of
economics at the British Chambers of Commerce (BCC), an industry
representative body.
“The deterioration in the UK’s net trade position is further confirmation
that we are still some way from achieving a rebalancing of the economy.”
(1 British pound = 1.28 U.S. dollars)
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