U.K. Economy Gains Momentum With Services Dominating Growth

  • Services gain 0.7% as industrial output, construction fall
  • Bank of England policy makers focusing on global risks

U.K. Economy Grew 0.5% in Fourth-Quarter

The U.K. economy gained a little momentum at the end of last year, thanks entirely to the services industry.

Gross domestic product rose 0.5 percent in the fourth quarter from the previous three months, when it expanded 0.4 percent, the Office for National Statistics in London said on Thursday. The increase was in line with the median estimate of economists in a Bloomberg survey.

While output has expanded for 12 straight quarters and unemployment is at its lowest rate for a decade, the expansion remains lopsided, with services the dominant driver and exports and manufacturing remaining sluggish. Bank of England policy makers are focusing on the global risks to the economy and are forecast to keep their key interest rate unchanged on Feb. 4, when they will also publish new growth and inflation forecasts.

BOE Governor Mark Carney said this week that domestic cost pressures need to pickup to justify increasing the benchmark rate from 0.5 percent, where it’s been since 2009. Some economists now see borrowing costs staying at a record low for another year. GDP grew 1.9 percent in the fourth quarter from a year earlier, the slowest annual rate since the start of 2013.

“Carney’s conditions for raising interest rates -- which include growth looking strong enough to eliminate the remaining slack in the economy -- are probably still not met,” said Vicky Redwood, an economist at Capital Economics in London. “The recovery still looks very unbalanced.”

‘Brexit’ Risk

Britain also faces the possibility of a referendum on whether to stay in the European Union in June. Pro-EU campaigners say a decision to leave the bloc would hit investment and employment and send the pound tumbling.

Sterling has lost almost 3 percent against the dollar this month, though it gained after the GDP data. It was up 0.6 percent at $1.4312 as of 11:15 a.m. London time.

Thursday’s figures underline the economy’s continued reliance on consumers, who are benefiting from rising employment, falling oil prices and real wage growth. Growth in services, which account for about 79 percent of GDP, accelerated to 0.7 percent in the quarter with business services and finance providing the biggest contribution. Industrial production fell 0.2 percent, with manufacturing unchanged.

ONS estimates for December show services growth picking up to 0.3 percent from 0.2 percent in November, industrial output falling at a slower pace -- 0.2 percent -- and the construction industry bouncing back strongly with growth of 2.2 percent following a contraction the previous month when heavy rains forced projects to be put on hold.

Global Turbulence

Chancellor of the Exchequer George Osborne said the latest quarter shows the economy is continuing to grow steadily.

“Despite turbulence in the global economy, Britain is pushing ahead,” he said in a statement. “With the risks we see elsewhere in the world, there may be bumpy times ahead.”

The latest GDP data come a day before the U.S. publishes its fourth-quarter estimate, with economists predicting annualized growth of 0.8 percent following 2 percent in the third. Federal Reserve policy makers on Wednesday acknowledged the global risks in a statement that economists interpreted as diminishing the chances of a March rate increase in the U.S.

Annualized growth in the U.K. in the fourth quarter was 2 percent following 1.8 percent in the third. In 2015, expansion slowed to 2.2 percent from 2.9 percent in 2014. The International Monetary Fund forecasts that it will expand 2.2 percent this year, and that the U.S. will grow 2.6 percent.

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