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UK economic growth picks up pace to increase chance of BoE rate hike

By Oliver Haill

Date: Friday 26 Jan 2018

UK economic growth picks up pace to increase chance of BoE rate hike

(ShareCast News) - The British economy grew more strongly than economists expected in the final three months of 2017, official data showed on Friday, increasing the chances that the Bank of England could raise interest rates again this year.
Gross domestic product grew 0.5% in the fourth quarter from October to December, compared to the preceding quarter, according to an initial estimate from the Office for National Statistics. This was an improvement from 0.4% in the third quarter and on the 0.4% the market expected.

Compared to the fourth quarter of 2016, GDP growth slowed to 1.5%, from the 1.7% annual growth in the previous quarter, but again this was better than the 1.4% consensus forecast. This meant growth for 2017 as a whole was 1.8%, only slightly lower than the 1.9% in 2016.

Overall industrial production growth slowed from 1.3% to 0.6%, while the construction sector's recession intensified, with growth falling from -0.5% to -1.0%. This was offset, however, by a pick-up in growth in the more dominant services sector, from 0.4% to 0.6%, which was the strongest quarterly increase in the year.

"Despite a slight uptick in the latest quarter, the underlying picture is of slower and uneven growth across the economy," said the ONS's head of GDP, Darren Morgan.

"The boost to the economy at the end of the year came from a range of services including recruitment agencies, letting agents and office management. Other services - notably consumer-facing sectors - showed much slower growth. Manufacturing also grew strongly but construction again fell."

The ONS also revealed that the UK index of services for the three months to November grew 0.4% as economists predicted, up from the 0.3% growth in the previous three month period. On a single month basis November grew 0.4% compared to October, when it had grown 0.2%.

Sterling climbed even higher on the GDP news, within touching distance of $1.43.

Earlier on Friday, Bank of England governor Mark Carney said he could see a "conscious re-coupling" between the UK and the booming world economy. Carney, who also defended his gloomy predictions about the effects of the Brexit referendum, said the BoE did now "see some potential for a bit of a pick-up", with the UK economy "expected to be about two percentage points below what had been expected before the referendum" by the end of 2018, though he stressed this was a "short term" effect.

The fourth quarter GDP numbers rounded off a "solid, albeit unspectacular year", said Paul Hollingsworth at Capital Economics, who to give him credit had in February last year forecast growth for 2017 to come in at about 1.8%.

He noted that GDP growth "was almost four times as strong as the post-referendum consensus prediction. What's more, growth would have been a touch stronger if it weren't for the closure of the Forties oil pipeline in December, which knocked off 0.05pp off GDP growth in Q4".

Looking ahead, most forecasters expect the economy to slow this year, with a consensus forecast of 1.4%.

"However, with inflation dropping back, easing the squeeze on households' real incomes, investment intentions remaining strong and exporters still benefitting from a weaker pound (against the euro at least) and a robust global economy, we continue to think that the economy should continue to grow by about 2%," Hollingsworth said.

Ian Stewart, chief economist at Deloitte agreed with Carney that activity had softened since the referendum, but less than widely expected.

"GDP growth in 2017 came in above forecast, with activity edging higher into the end of the year after a sharp downturn in the first half.

"A strong global recovery and a weak pound are boosting UK exports and manufacturing. With inflation pressures starting to ease we expect 2018 to see another year of unspectacular, but far from disastrous, UK growth."

Economist Samuel Tombs at Pantheon Macroeconomics said the strong GDP print "increases the chances that the MPC follows up November's interest rate rise as soon as this summer".

The 1.% fall in construction sector output was the third consecutive fall, "showing that Brexit risk has reduced long-term investment", Tombs added.

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