U.K. Economy Loses Momentum as Pace of Growth Revised Lower

Cutting to the Core: Inflation's Role in BOE Policy
  • Third-quarter GDP revised to 0.4% growth from previous 0.5%
  • Data may add to case for BOE to keep rates at record low

The U.K. economy expanded less than previously estimated in the past two quarters in a sign growth is losing some momentum.

Gross domestic product rose 0.4 percent between July and September instead of the 0.5 percent previously estimated, the Office for National Statistics in London said on Wednesday. Growth in the second quarter was revised down by 0.2 percentage points to 0.5 percent.

The revisions indicate a loss of momentum in an economy that continues to rely heavily on consumers and domestic demand. While the economy is seen growing 2.3 percent next year, almost matching 2015’s pace, economists in a Bloomberg survey published Tuesday highlighted a British exit from the European Union as a potential threat to the U.K. outlook.

The performance in the latest three months matched the weakest since 2012 and compared with quarterly growth that averaged 0.7 percent last year. The Bank of England held its benchmark interest rate at a record-low 0.5 percent this month and officials have indicated they are in no hurry to follow the Federal Reserve, which raised the key U.S. rate for the first time in almost a decade last week.

“The combination of the weaker-than-expected readings on both the demand and costs side of the economy increases the odds that the Bank of England will delay liftoff until the second half of 2016,” said Dan Hanson and Jamie Murray, analysts at Bloomberg Intelligence.

GDP Per Head

The changes left annual growth in third quarter at 2.1 percent, down from a previous estimate of 2.3 percent. Downward revisions to the finance industry explained the shift in the estimate for the latest period from the second quarter, while inventories led to the amendment for the reading for the three months through June.

The figures paint a picture of an economy continuing to be led by domestic demand, with consumer spending rising an upwardly revised 0.9 percent in the third quarter and real disposable income growing 4 percent on the year, the fastest annual pace since the start of 2010. Wages and salaries rose 1.2 percent. Spending was also aided by consumers’ willingness to hold onto less of their income, with the saving ratio dropping to 4.4 percent, matching the second-lowest on record.

Global Headwinds

Government spending and business investment also contributed to growth, while net trade knocked 1 percentage point off output as exports fell. A strong pound and the global economic slowdown are weighing on manufacturers.

The current-account deficit -- the difference between money coming into the U.K. and money sent out -- was little changed at 17.5 billion pounds ($26 billion) in the third quarter, equating to 3.7 percent of GDP. A doubling in the trade deficit was offset by a sharp narrowing in the deficit on investment income.

For Bank of England rate-setters, the decision about when to begin exiting almost seven years of emergency stimulus hinges on productivity. As labor shortages emerge, companies need to get more from existing workers if the economy is to maintain its momentum with generating inflationary pressures.

Separate figures showed output per hour rose 1.3 percent in the third quarter from a year earlier, while unit labor costs climbed 2 percent, down from 2.2 percent in the second quarter.

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