United Kingdom: UK growth rate ticks up in Q3, feeding expectations of an imminent interest rate hike
October 25, 2017
The British economy picked up pace in the third quarter of the year, according to preliminary data released by the Office for National Statistics (ONS) on 25 October. Growth came in at 0.4% quarter-on-quarter, a smidgeon above Q2’s 0.3%, beating analysts’ expectations. On an annual basis, the economy expanded 1.5% in Q3, matching Q2’s figure. The solid performance is likely to add further weight to the voices calling for a rate rise at the Bank of England’s (BoE) upcoming 2 November monetary policy meeting. A stronger-than-expected economy, combined with the pass-through effect of the weaker sterling, could cause inflation to rise further above the Central Bank’s 2.0% target without a reduction in monetary stimulus.
However, the Q3 figure should be put into context. The UK’s growth is still fairly mediocre compared to the rate of expansion in the rest of the European Union, which is currently enjoying something of an economic sweet spot. It is also fairly average by recent domestic historical standards, particularly given the tailwind provided by buoyant demand from key trading partners.
The service sector—the engine of the economy, accounting for roughly 80% of GDP—drove the expansion in Q3, on the back of a strong showing from the business services and finance sub-sector (Q3: +0.4% quarter-on-quarter; Q2: +0.4% qoq). In contrast to the previous quarter, manufacturing contributed positively to growth thanks to expansions in the transport equipment, other manufacturing and repair, and manufacture of machinery sub-sectors. Healthier manufacturing drove a 1.0% expansion in industrial production (Q2: -0.3% qoq). However, construction slid for the second consecutive quarter (Q3: -0.7% qoq; Q2: -0.5% qoq). This fits in with the marked fall in the construction PMI observed since the middle of the year, as firms report that political and economic uncertainty is causing commercial developments to be delayed. However, the sector still remains substantially above its pre-downturn peak, according to the ONS. Rounding off the sectoral picture, agriculture expanded 1.0% in Q3, up from a 0.1% decline in Q2.
Looking ahead, growth over the next few quarters is likely to be nothing to write home about. The economy seems set to continue expanding at a mediocre pace, propped up by solid external demand and still-loose monetary policy—despite the BoE foreseeably engaging in mild monetary tightening. Uncertainty generated by Brexit is likely to permeate the economy ever more deeply, which will dampen fixed investment, until clarity emerges regarding the UK’s future trading relationship with the European Union. In addition, private consumption growth is likely to slow further next year, as inflation continues to eat into households’ pay and the labor market softens.
Author: Oliver Reynolds, Economist
