UK growth slowest in four years

Shoppers take a break on Oxford Street in London. (Reuters Photo)

LONDON: Britain’s economy grew at its slowest pace since 2013 in the 12 months after last year’s Brexit vote, data showed on Friday, painting a subdued picture as the Bank of England prepares to raise interest rates for the first time in a decade.

The world’s fifth-biggest economy expanded by just 1.5% in the second quarter, the weakest year-on-year expansion in more than four years and down from a rate of 1.8% in the first three months of the year. The Office for National Statistics had previously estimated second-quarter growth at 1.7%, and none of the economists polled by Reuters before the data had expected such a big downward revision.

Friday’s data also showed a monthly fall in output for the services sector in July, boding poorly for third-quarter growth. Sterling fell after the data and prompted some economists to reconsider their prediction of a rate increase at the end of the central bank’s next meeting on Nov 2.

“I’m sticking to my call for a hike in November, but I’m much more nervous now than I was prior to this data release,” Scotiabank’s Alan Clarke wrote in a note to clients.

However, the weak data might not stand in the way of the BoE raising interest rates from their record low 0.25%. Governor Mark Carney said on Friday the economy was on track for a rate increase “in the relatively near term”, two weeks after the central bank jolted markets by flagging a rate rise “in the coming months”, despite weak growth this year.

The BoE has downgraded its estimate of how fast Britain’s economy can grow without generating excess inflation because of the impact of Brexit, so Friday’s weaker growth picture is not necessarily fatal for the chances of a November rate rise.

A major annual set of revisions of official data showed show stronger business investment, net exports and household savings, but also a larger current account deficit. Britain took in 23.2 billion pounds ($31 billion) of foreign finance in the three months to June, far above economists’ forecast of 16 billion pounds, and the first-quarter deficit was revised up to 22.3 billion pounds from 16.9 billion.

Business investment grew by an annual 2.5% in the second quarter, compared with an earlier estimate that it had stagnated, and the household savings ratio was a relatively healthy 5.4% in the second quarter. Net exports contributed 0.4 percentage points to quarterly growth, compared with earlier estimates of zero, and an inflationary squeeze on consumers may be easing, with real household disposable income up 1.6% in the latest quarter, the most since 2015.

Nonetheless, the broader picture remains one of consumers under pressure from a steep rise in inflation caused by the fall in the pound since last year’s Brexit vote. Disposable income has fallen year-on-year for the last four quarters, the longest period since 2011.

Overall quarterly GDP growth was unrevised at 0.3%, and the services sector, which makes up 80% on the economy, contracted by 0.2% in July. 

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