Sluggish UK growth to keep BoE cautious

Interest rates are likely to remain unchanged until the autumn as new monthly GDP data shows a small pick-up in growth.

10/07/2018
London-Tower-Bridge-with-Business-Skyline

Authors

Azad Zangana
Senior European Economist and Strategist

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 increase 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.

Schroder Investment Management Limited - Dubai Branch is a DIFC Foreign Recognised Company. The DIFC Branch is duly authorized and regulated by the Dubai Financial Services Authority. The content of this material is not intended nor is it to be considered as financial advice and is only for the purpose of knowledge. This material has not been approved by any regulator/authority in the Middle East region. Accordingly, no regulator/authority has approved this information material or any other associated documents nor taken any steps to verify the information set out in this material and has no responsibility for it.

 

We have made every effort to ensure the accuracy of the information in this document. However, we cannot be held responsible for any errors, mistakes, or omissions, or for any actions taken based on this information. If you do not fully comprehend the content of this document, we recommend seeking advice from an authorized financial advisor.

This research and the information contained herein may not be reproduced, distributed, or transmitted in DIFC or in any other jurisdiction to any other person or incorporated in any way into another document or other material without our prior written consent.

Authors

Azad Zangana
Senior European Economist and Strategist

Topics

Follow us

Issued by Schroder Investment Management Limited. Authorised and regulated by the Financial Conduct Authority.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

© Copyright 2018  Schroder Investment Management (Europe) S.A. All rights in all countries.

Schroder Investment Management Limited – (Dubai Branch) is regulated by the Dubai Financial Services Authority (“DFSA”)