business

U.K. Economy Remains a Laggard Even as GDP Beats Forecasts

Updated on
  • GDP rose 0.5% in 4Q, but 2017 was the weakest in five years
  • BOE Governor Carney says Brexit holding back the economy

Hammond Says U.K. Seeks Closest Possible Access to EU

The U.K. economy ended 2017 on a stronger-than-expected note, but it’s moving at a pedestrian pace given the global acceleration that’s taking place.

The 0.5 percent expansion in the fourth quarter announced on Friday was better than the 0.4 percent forecast by economists in a Bloomberg survey. For the full year, growth slowed to 1.8 percent, the weakest in five years, as consumers and companies felt the repercussions of the 2016 vote to the leave the European Union.

Could Do Better

U.K. economic growth has slipped down the G7 rankings

Source: National statistics offices, Bloomberg surveys

While the economy has performed better than some predicted before the Brexit vote -- growth in the fourth quarter was the strongest in a year -- Britain has failed to latch on to a global upswing that’s propelling its Group of Seven peers.

Estimates suggest that it’s lagging well behind Germany and the U.S., while Bank of England Governor Mark Carney noted Friday that Brexit has cost the economy tens of billions of pounds in lost output.

Growth last year was a “particular disappointment given the rapidly improving global economy,” said Suren Thiru, head of economics at the British Chambers of Commerce.

The pound, which was higher on the day before the report, briefly extended an advance before falling back. The currency was 0.8 percent higher at $1.4257 as of 11:31 a.m. London time.

Under Pressure

In a sign of how far Britain’s star has fallen, International Monetary Fund forecasts this week saw upgrades for almost every major economy except the U.K, which is seen growing at 1.5 percent this year and in 2019.

Economists surveyed by Bloomberg are even more pessimistic, expecting growth to slow to 1.4 percent in both years, as living standards remain under pressure from the sterling-induced upsurge in inflation and companies delay investment until they see what Brexit means for trade. More signs of the struggles facing business came in government data Friday showing insolvencies rose in 2017.

Asked in a BBC radio interview Friday to quantify the damage from Brexit, Carney said the economy is about 1 percentage point smaller than it would have been had the EU referendum gone the other way, and that the gap will widen to about 2 percentage points by the end of the year. That’s the equivalent of about 40 billion pounds ($57 billion).

The BOE raised interest rates for the first time in a decade in November after assessing that supply constraints mean the economy can now grow by only 1.5 percent a year without generating unwanted inflationary pressures. Another hike is forecast late in 2018, though some economists, including David Owen at Jefferies, see it coming as soon as May.

Officials will announce their next policy decision, as well as unveil new economic projections, on Feb. 8.

What Our Economists Say:

“The data flow this week has significantly increased the chances that the Bank of England delivers a hawkish message at its February meeting. Whether it can execute will depend heavily on the data continuing to suggest slack is being eroded. If it does, a rate hike this year will become a real possibility.”

-- Dan Hanson and Jamie Murray, Bloomberg Economics

The fourth quarter saw the dominant services industry grow by 0.6 percent -- faster than in the third quarter -- and manufacturing expand 1.3 percent as exporters benefited from stronger global growth. The GDP estimate is based on 44 percent of the data that will ultimately be available.

— With assistance by Harumi Ichikura, Mark Evans, Brian Swint, and Catherine Bosley

(Adds data on insolvencies in eighth paragraph.)
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