May rate rise on ice as GDP data 'worse than feared'

Marcus Newton
April 28, 2018

Production increased by 0.7%, with manufacturing growth slowing to 0.2%, though slowing manufacturing was partially offset by an increase in energy production due to the below-average temperatures.

"Our initial estimate shows the United Kingdom economy growing at its slowest pace in more than five years with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly", said Rob Kent-Smith at the Office for National Statistics.

The "Beast from the East" and subsequent storms effected retail sales but the impact on GDP was "generally small, with very little impact observed in other areas of the economy".

Sterling fell to a 6-week low versus the dollar on Friday as investors awaited British economic growth data that could determine whether the Bank of England raises interest rates in May.

"Our initial estimate shows the United Kingdom economy growing at its slowest pace in more than five years with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly", Rob Kent-Smith, the ONS' head of national accounts said in a statement.

It was worse than the slowdown to 0.3% predicted by economists, and represents the weakest quarterly growth since the end of 2012.

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Expectation is for a +0.3% q/q reading and a +1.4% y/y reading.

The ONS stated services industries were the largest contributors to GDP growth, increasing 0.3%, however the longer-term trend shows a weakening in services growth. "The 0.1% quarterly rise was below the consensus estimate and the MPC's forecast of 0.3%", Paul Hollingsworth, a senior United Kingdom economist at Capital Economics said in an email.

Ben Brettell, senior economist at Hargreaves Lansdown, said that taken with the latest GDP figures, the chances of a rate rise had now fallen dramatically.

"If there is an interest rate hike at all this year it now seems unlikley it will come before October".

Rate-setters will also have to consider recent easing in inflation rates, with the Consumer Price Index having dropped back from 2.7 per cent to 2.5 per cent in March; marking a one-year low and bringing it closer to the Bank's two per cent target.

"In fact, given Bank of England Governor, Mark Carney, warned over weak retail sales and softer levels of business investment just last week, until, or unless, the economic picture improves it seems unlikely that interest rates will go anywhere".

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