United Kingdom: Economy remains weak in the fourth quarter
GDP reading: GDP increased 0.1% on a seasonally adjusted quarter on quarter basis in Q4 (Q3: 0.0% s.a. qoq), beating forecasts of a contraction. That said, this was purely due to a surge in inventories, and underlying economic momentum was downbeat, with private spending, fixed investment and exports all shrinking. Moreover, GDP per head shrank for the second straight quarter, suggesting that only brisk population growth kept overall economic output from falling. The strictures of Brexit, higher overseas uncertainty following the election of Donald Trump in the U.S, and tax rises announced in the autumn budget likely all weighed on activity in Q4. On an annual basis, economic growth accelerated to 1.4% in Q4, following the previous quarter’s 1.0% expansion.
Drivers: Private consumption contracted 0.1% in Q4 (Q3: +0.6% s.a. qoq). Government consumption improved to a 0.8% increase in Q4 (Q3: +0.3% s.a. qoq). Meanwhile, fixed investment contracted 0.9% in Q4 (Q3: +1.0% s.a. qoq). On the external front, exports of goods and services contracted 2.5% in Q4, (Q3: -0.8% s.a. qoq). Conversely, imports of goods and services rebounded, growing 2.1% in Q4 (Q3: -2.5% s.a. qoq).
GDP outlook: Our Consensus is for a slight acceleration in GDP growth in Q1, though growth will remain weak compared to the levels the economy enjoyed up to the decision to leave the EU.
Panelist insight: On the fiscal implications, ING’s James Smith said:
“The lacklustre end to 2024 will only cement the loss of fiscal headroom the Treasury must now grapple with. The Office for Budget Responsibility – the government’s independent forecaster – has predicted 2% growth this year. It now looks likely it will be around half that. The OBR will unveil new forecasts to coincide with the Spring Statement on 26 March. Lower growth forecasts will chip away at revenue predictions, while higher market rates mean debt interest forecasts will rise too. All of this suggests the Chancellor’s ‘headroom’ has likely been completely eroded. This headroom, which refers to the surplus funds remaining after meeting the primary fiscal rule of balancing the current budget later this decade, was just £10bn as of October.”