UK growth edges higher, but BoE likely to hold

Quickview: Despite a pick-up in growth in Q4, annual GDP growth decelerates to its lowest rate since 2012.

26 January 2018

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

The initial estimate of GDP growth for the final quarter of 2017 showed the economy maintained a sluggish pace of growth of 0.5% quarter-on-quarter. This takes GDP growth for 2017 to 1.8%, which is a fall from 1.9% in 2016, and the lowest annual growth rate since 2012.

Slight growth pick-up is encouraging

Within the details of the release, production industries grew by 0.6% in the final quarter of 2017, compared to a contraction of 1% in construction, and 0.6% growth in services. For the year overall, industrial production (including manufacturing) grew by 2% - the sector’s best year since 2010. Meanwhile, the construction sector grew by 5.1%, also a strong showing despite recent falls. Finally, the services sector grew by just 1.6%, a fall from 2.5% in 2016, but also the weakest year since 2011.

Overall, the latest data showing a slight pick-up in growth is encouraging. Looking ahead, as inflation begins to decline the pressure on household finances will ease, encouraging more consumption. Concerns over Brexit remain for businesses, which is evident from the recent decline in construction output, and the slowdown in business services and finance, which recorded its lowest annual growth rate since the global financial crisis.

BoE expected to hold interest rates

What does this mean for interest rates? The Bank of England is unlikely to react to these figures with a change in policy. The Bank is currently undergoing an assessment of the supply side of the economy, which will help guide the Monetary Policy Committee’s judgement on both the slack remaining in the economy, and the UK’s potential growth rate. We continue to forecast interest rates being kept on hold until after the UK leaves the European Union in 2019.

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