News releases

Sluggish UK growth to keep Bank of England cautious

Interest rates are likely to remain unchanged until the autumn as new monthly Gross Domestic Product (GDP) data shows a small pick-up in growth, comments Schroders' Senior European Economist, Azad Zangana: 

The Office for National Statistics (ONS) published its first ever monthly GDP release, showing the UK economy grew by 0.3% in May (month-on-month), compared to 0.2% in April and no growth in March. While the introduction of monthly data should provide more accurate estimates of economic growth, there are two drawbacks.

First, monthly data can be more volatile, and so there is a great deal of emphasis on the rolling three-month average by the ONS. Using this measure, the economy grew by 0.2% in May, unchanged compared to the first quarter of the year.

Within the details of the three-month average, services sectors were the main drivers of growth, as production sectors including manufacturing and construction were a drag on the economy. The wholesale and retail trade sector has seen strong growth, partly thanks to the warm weather that has encouraged more spending. Growth in the sector rose 0.9% in the three months to May – its fastest rate of growth since August 2017. To the downside, manufacturing output contracted by 1.2% - its worst period of decline since December 2012.

The second drawback of the monthly release is that the full second quarter estimate of GDP will not be available until 10 August, several weeks later than usual, but crucially, after the Bank of England’s (BoE) August Inflation Report.

At its last meeting, the BoE held interest rates at 0.5%, but three of the nine member monetary policy committee voted to lift interest rates. Markets have increased the probability of a rate rise in August, especially following more optimistic comments from Governor Mark Carney. However, with the current political turmoil surrounding the government’s Brexit negotiations, it may be prudent to take a cautious stance and keep interest rates on hold a little longer.

We continue to forecast a 25 basis point hike in November. After all, the latest GDP figures are hardly pointing to a strong rebound in growth following the slowdown in the first quarter of the year.

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Note to Editors

Important Information: The views and opinions contained herein are those of Azad Zangana, Senior European Economist, Schroders, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.