The Bank of England remains overly cautious on the outlook for inflation and growth as the UK economy continues to face both external and domestic headwinds.
London - The UK economy, among the most open in the world, continues to face significant external headwinds. This led the Bank of England (BoE) to cut its short-term outlook for both growth and inflation.
In a testimony to the UK Treasury Select Committee (TSC) on Tuesday this week, BoE Governor Mark Carney warned against much bigger shocks from the emerging market.
"We all have to be prepared for the possibility that this economy could be hit by bigger shocks, particularly from abroad," Carney told the lawmakers. He said "the FPC [Financial Policy Committee] is focused on ensuring that the banks are adequately capitalized for a very large emerging market shock, much larger than we are experiencing at the moment."
BoE rate-setter Gertjan Vlieghe was also speaking before the TSC this week. When asked what he thought the next move in the BoE interest rate would be, Vlieghe said: "I have relatively little tolerance for further downside surprises and should downside surprises continue than I think we would get relatively quickly to a point where I would find it appropriate to respond to it."
Vlieghe at the same time said that resilience in domestic demand "is sufficient to offset the external headwinds, and given there is little slack in the economy, there is to be a gradual upward path for cost pressures."
The possibility of 'Brexit' also remains one of the most significant risks to short-term growth and stability. Governor Carney and BoE Deputy Governor Jon Cunliffe will be giving more details on those risks in parliament on March 8.
Second estimate of Q4 GDP
The second estimate of the UK economic growth in the final quarter of last year could come out weaker than first announced, although expectations point to no headline figure changes.
The first estimate showed the economy grew at the rate of 0.5%, one percentage point up from the previous quarter, while the annual rate of quarterly growth decelerated to 1.9% . But the first GDP calculation was based only on less than 50% of all the data available, and did not include expenditure figures, such as trade balance, business investment, or domestic spending.
Meanwhile, the most recent data from the UK's official statisticians showed both the industrial production and construction sectors slowed more than was first estimated during the fourth quarter of 2015. Office for National Statistics (ONS) analysts said those two downward revisions would have a negative impact of as much as 0.06 percentage points on total growth.
The ONS also advised to watch for the fresh services sector figures, whose weight on the GDP increased to 79% and remained the ultimate growth driver in the fourth quarter. The month-on-month December service data will be published alongside the growth figures.
Mixed outlook
According to the National Institute of Economic and Social Research (NIESR), the economy slowed down over the three months to January to 0.4%, which NIESR said was primarily due to weakness in the production sector during November and December last year.
Despite this deceleration at the start of the year, NIESR analyst James Warren said they "do expect the economy to grow by 2.3% this year, primarily driven by consumer spending. However, negative contributions from net trade are expected to weigh heavily on growth. There exist a number of downside risks that have the potential to exacerbate this, should they materialize." NIESR expects growth to accelerate to 2.7% in 2017.
The BoE February Inflation Report forecast showed the economy was seen growing persistently above the 2% growth rate for the whole forecast period, until the end of 2018, while inflation in the short term is expected to remain significantly subdued.
"Although activity growth in the UK has slowed slightly below average rates, the domestic private sector remains resilient. Consumer confidence is robust, supported by a pickup in real income growth and overall investment intentions continue to be firm, although a sharp retrenchment in capital spending in the oil and gas sector is under way," the February Inflation Report said.
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