UK GDP growth grinds to near-halt, knocking nail into May hike coffin
UK economic growth in the first quarter was the worst in more than five years, undermining the case for a Bank of England rate hike next month.
Gross domestic product grew just 0.1% in the first three months of the year compared to the preceding month, the Office for National Statistics revealed on Friday, which was far slower than the 0.4% in the fourth quarter and much worse than the slip to 0.3% that had been forecast. It was the weakest quarterly growth since the end of 2012.
This initial estimate from the ONS showed the UK economy growing at its slowest pace in more than five years due to a significant fall in construction output, weaker manufacturing growth and continued subdued growth for consumer-facing services. While industrial production growth accelerated to 0.7% from 0.4%, construction fell outright 3.3% and services sector growth slowed to 0.3% from 0.4%.
Snow and other bad weather from the 'Beast from the East' during the quarter had a relatively small overall impact across the UK.
“While the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales,” said Rob Kent-Smith, the ONS's head of national accounts.
Compared with the same quarter a year ago, the economy grew 1.2%, well below its five-year average of 2.2% and the slowest rate in almost six years.
RATE HIKE ODDS TUMBLE
Markets' pricing of the the likelihood of a BoE hike in May quickly fell to 20%, down from about 50% the day before and 90% a week ago, with the market now seeing the next hike in November. This saw the pound tumble more than 1% on the dollar to 1.3760 and 0.9% against the euro to 1.1394.
Such a poor GDP reading cast further doubts on the health of the economy, said economist Chris Williamson at IHS Markit, and "seriously knocking the case" for what had been seen by many as a likely BoE interest rates hike in May.
"Some scope for upward revision is possible as these are only initial estimates, but it’s clear that the disappointing GDP numbers in the first quarter confirm that the economy started the year on a far weaker footing than the Bank of England had been expecting," he added.
“The fact that the GDP numbers have clearly been distorted by weather effects confuses the picture for policymakers. Even with the sharper than expected slowdown, the Monetary Policy Committee may be inclined to look through what may well prove a temporary slowdown, and instead focus on signs that pay growth is improving (recent official data showed private sector pay growth accelerated to 3.0% in the three months to January, and the unemployment rate slipped back to 4.3%, its joint-lowest since the 1970’s, underscoring the tightness of the labour market). As such, a May rate hike would still be on the cards."
Paul Hollingsworth at Capital Economics said it is "probably the final nail in the coffin" for the chance of an interest rate hike in May, though he thought the slow patch "should prove to be transitory, if past experience is anything to go by".
"Nonetheless, the MPC is unlikely to be confident enough in two weeks’ time that there isn’t some underlying weakness too. As a result, we now no longer think that the MPC will hike interest rates in May. Instead, we expect the MPC to raise rates again in August.
"But if we are right in thinking that a recovery in real earnings will help consumer spending, and overall GDP growth, to regain some pace over the coming quarters, then the bigger picture is still that rates are likely to rise faster than markets expect."
Some economists, however, such as those from Barclays were remaining fixed on a May hike on the view that the MPC will see the underlying trend still "somewhere slightly above potential".
With volatility in construction mostly to blame for the GDP weakness, and services dragged down in February by temporary softness, Barclays economist Sreekala Kochugovindan said she believed today’s release "reveals little regarding whether the underlying trend has changed or not".
"If the MPC believed in March that a hike in May is on the cards, it is in our view still on the cards today. We stick with our call for a hike in May," she wrote, recommending clients sit tight.
"We maintain our expectation of a rate hike in May on the grounds that the MPC will have sufficient reasons to believe that Q1 soft data are temporary and that the underlying trend, in their view, is still somewhere slightly above potential. Whether Q2 data make up completely for Q1 weakness remains to be seen, but these are in our view considerations regarding the likelihood of further hikes beyond May."