The UK economy slowed in the third quarter but both soft and hard data suggest growth is holding its momentum, as weak inflation and cheap oil help boost domestic consumption and investment.
The UK economy slowed in the third quarter while both soft and hard data suggest growth continues to hold momentum, as weak inflation and cheap oil help boost domestic consumption.
The final estimate of the third-quarter GDP is expected to show no change to headline figures. Quarter-on-quarter growth is expected to have slowed to 0.7% from 0.9% in the second quarter. On a yearly basis, output should also remain unchanged at 3%. The Office for National Statistics (ONS) is releasing the final estimate on Tuesday, 9:30 AM GMT.
Business investment to continue growing
The previous estimate showed the economy in the third-quarter was dragged down primarily by weaker exports (-0.4%) and an unexpected sharp decline in business investment, falling 0.7% between the quarters.
However, the quarterly data on business investment tend to be highly volatile and subject to significant revisions, while surveys and market intelligence received from across the country point to "continued capital spending growth," the Bank of England's (BoE) chief policymakers argued at the December meeting of the bank's Monetary Policy Committee (MPC).
Weak trade balance, strong domestic consumption
In terms of the trade balance, weaker exports in the third quarter partly reflect a cooling demand from the UK's major trading partners such as the euro zone. Net trade again remained the largest drag, as the total trade balance deficit widened from £8.9 billion in the second quarter to £11.2 billion in the third quarter and contributed negatively with 0.5 percentage points to total growth, the second estimate showed.
The largest upward drivers in the third quarter were again households consumption and output in the services sector, which both increased 0.8%.
Stronger construction to boost Q3 growth
Also, a significant upward revision occurred in the construction sector. While the second GDP estimated showed output in this sector rose 0.8% in the third quarter, the updated data revealed a sharp upward revision to a 1.6% rise.
Taken on its own, the construction sector would push the third-quarter GDP from 0.7% up to 0.8%. But given the fact the construction sector accounts for just some 6.3% of total GDP there are other significant drivers that can weigh on the total growth.
GDP outlook
On the outlook for the fourth quarter, the BoE said in its December forecast that "short-term indicators suggested that underlying momentum had been sustained into the fourth quarter. Bank staff expected GDP growth of around 0.6% in Q4, with the risks to that expectation probably to the upside.” In its November PMI surveys, Markit Economics said it expected a 0.6% growth in the fourth quarter."
Due to external price pressures being suppressed significantly, inflation in the UK is expected to fall temporarily below 1%, possibly in December, or within the next six weeks, according to the BoE estimate.
Weak inflation to boost spending in Q4
Markedly weak price pressures thus give a healthy boost to domestic spending. According to the official statistics, retail sales volumes accelerated sharply in the first two months of the fourth quarter and the first round of soft data suggest retailers continued to enjoy strong sales in December too.
In the run-up to Christmas, retail sales growth accelerated at its fastest pace for almost 26 years, according to the Confederation of British Industries (CBI). Sales were bolstered by the UK version of 'Black Friday' - the day following Thanksgiving Day in the United States, which, since the early 2000s, has been regarded as the beginning of the Christmas shopping season.
Political uncertainties
One of the risks on the downside is next year's general election, due in May. Market participants will be nervously keeping their eyes on the bickering politicians. The increased level of anti-European Union rhetoric and anti-immigration sentiment ahead of the polls suggest those topics may seize the pre-election frenzy and nervousness among investors may rise subsequently.
Monetary policy
While the data suggest the UK economy continues to hold momentum, market expectations of the first hike in the BoE's base interest rate have been pushed back towards late 2015 following a dovish Inflation Report in November and the subsequent comments from the BoE's top officials. \
However, some market participants argue those late expectations are overblown and that the BoE may begin to hint at a rate hike sometime early next year before a first hike in August.
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