U.K. Economy Expands Less Than Forecast as Production Cools

Updated on
  • Construction falls 2.2% in 3Q, manufacturing shrank 0.3%
  • Services growth accelerates to 0.7% led by business services

U.K. Economy Expands 0.5% in Third-Quarter

U.K. economic growth cooled as manufacturing contracted for a third quarter and construction shrank the most since 2012, a sign that Britain may be falling prey to global headwinds.

The slowdown to 0.5 percent in the three months through September from 0.7 percent was sharper than economists had forecast. The Office for National Statistics said construction shrank 2.2 percent in the quarter and manufacturing contracted 0.3 percent, while overall production growth cooled to 0.3 percent from 0.7 percent.

The report may signal that the emerging-market slowdown has damaged prospects for Britain’s expansion, and Chancellor of the Exchequer George Osborne said it shows the U.K. faces “clear global risks.” Bank of England Governor Mark Carney, who has previously said the timing for the first step to tighten policy will become clearer around the turn of the year, said Sunday that if increases aren’t needed, officials won’t act.

“The peak growth rate is probably behind us,” Kit Juckes, global strategist at Societe Generale, said in an interview on Bloomberg Television in London. “I think this keeps him on hold for now. What he is going to be looking at is the wage growth numbers. He’s got an economy that’s growing just sluggishly steadily.”


The pound fell after the data were published, and traded at $1.5329 at 10:04 a.m. London time, down 0.2 percent from Monday. The report is the first of three estimates from the ONS and may be revised, as it’s based on about 44 percent of the information that will ultimately be available.

The U.S. will report GDP growth for the third quarter on Thursday -- a day after the latest Federal Reserve policy decision -- and economists predict a slowdown to an annualized rate of 1.5 percent from 3.9 percent. On the same basis, the U.K. expanded 2 percent in the July-September period, down from 2.6 percent.

The question for the BOE is whether the economy slows further or picks up momentum again. Samuel Tombs, an economist at Pantheon Macroeconomics in London, said the economy is almost entirely dependent on services and the latest quarter is the “start of a pronounced slowdown.” At ING, James Knightley offered a more upbeat assessment, saying the domestic growth story “looks good” and numbers will improve this quarter.

Carney said in July growth needs to be sustained at a faster quarterly rate than 0.6 percent for spare capacity to be eliminated. He said in an interview with the Mail on Sunday newspaper that rate increases are “a possibility not a certainty,” and “if events mean that does not happen and rate rises are not appropriate then we will do the right thing and we will not adjust rates.”

Compared with a year earlier, U.K. GDP expanded 2.3 percent in the third quarter, compared with 2.4 percent in the second. Output is now 6.4 percent above its pre-recession peak. In the three months, growth in services, the biggest share of the economy, accelerated to 0.7 percent from 0.6 percent. A separate index of services showed no growth in August from the previous month, the weakest reading since January.

Some surveys show the slowdown is continuing in the current quarter. The Confederation of British Industry’s gauge of manufacturing orders dropped to the weakest since June 2013 this month.

The BOE is due to publish new growth and inflation forecasts on Nov. 5, alongside its policy decision. So far, only one official of nine has voted to increase the key rate from its current record-low 0.5 percent, while global headwinds and low inflation prospects have stayed the hands of the remainder.