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Schroders Quickview: UK economy slowdown

10/01/2014

Azad Zangana, European Economist at Schroders, comments on today's UK manufacturing data from the Office for National Statistics.

"The Office for National Statistics has revealed that both manufacturing output and the wider measure of industrial output were flat in November versus consensus expectations of a 0.4% increase for both compared to the previous month. Indeed, figures for October were also revised down therefore worsening the outlook. Separately, figures for construction output also disappointed for November – falling 4% compared to consensus expectations of a 0.8% growth. Along with historic downward revisions, year on year growth in construction output in November was just 2.2% compared to an expected level of 7.5%.

"Despite the wave of optimism on the UK economy, the evidence suggests that the economy slowed in the fourth quarter of 2013. We forecast fourth quarter GDP growth to slow to 0.5% from the 0.8% recorded for the third quarter. At this stage, we believe the slowdown is in reaction to the weak demand in the previous quarter and the subsequent build-up of inventories. The slowdown in activity will help reduce those excess inventories; however, we only expect to see a slight acceleration in growth in the first quarter of this year.

"While the slowdown is by no means a disaster, it will challenge the prevailing market views that the Bank of England will raise interest rates at some stage towards the end of this year. We believe the Bank of England will keep interest rates on hold until the start of 2016, regardless of the fall in the unemployment rate which it has chosen to base its forward guidance on. Indeed, we expect the Bank to reconsider the 7% unemployment threshold, and eventually lower the figure, and thereby signal a later rise in interest rates."

Important Information:
The views and opinions contained herein are those of Azad Zangana, Schroders and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

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