UK 2014 fourth-quarter GDP is expected to have slowed slightly from the previous quarter. But how much did the economy actually decelerate?
Expectations ahead of Tuesday's publication of the first official estimate of UK GDP suggest the economy slowed from 0.7% in the third quarter, down to 0.6% in the final three months of 2014. The first estimate is based on less than 50% of all the data available and the calculations include only figures from the output side of total growth, so we might see some further revisions in the following two estimates once all the data are included.
According to the official figures available so far, the overall industrial production remained volatile in October and November due to temporary closures of some oil and gas rigs in the North Sea. However, the manufacturing sector managed to pick up sharply in November after a weaker October.
Business surveys have indicated a slight deceleration from the early 2014 peaks. Markit/CIPS PMI report showed UK services, accounting for a significant 78% of UK GDP, lost some momentum in December after the headline PMI decreased to a 19-month low. Surveys of manufacturing and construction also weakened towards the end of the last year.
Referring to the monetary policy outlook in the UK in light of slowing growth, Markit's chief economist Chris Williamson said that "the surveys suggest the economy grew by 0.5% in the fourth quarter, and the loss of momentum towards the year end will no doubt fuel worries that the upturn is too fragile to withstand higher interest rates."
However, Berenberg bank UK chief economist Robert Wood, a former BoE official, wrote in a comment on January 6 that the current slowdown in business surveys was partly a reflection of overblown PMIs from early 2014 which Wood said were "more an aberration than a sensible assessment of UK growth."
BoE Revises Up Q4 Growth Forecast
The minutes of the Bank of England’s (BoE) Monetary Policy Committee (MPC) January meeting showed the central bank analysts revised the fourth-quarter growth forecast sharply up to 0.8%, seen after the final revision. "Bank staff estimated that output had continued to expand at a similar pace around the turn of the year with GDP growth in the final vintage of data expected to be 0.8% in Q4 and 0.7% in 2015 Q1," it said.
Low inflation, stronger spending to boost growth
The second and third estimates, due in February and March, will also incorporate expenditure data, including consumer spending figures which, according to the buoyant fourth quarter retail sales figures, should continue to boost growth significantly in the fourth quarter. The latest official data also showed the UK trade balance improved markedly in the first two months of the fourth quarter on the back of a decrease in oil imports, which fell to their lowest level since October 2010.
In its latest quarterly economic survey, the British Chambers of Commerce (BCC) said all export balances improved in the fourth quarter. However, John Longworth, director general of the BCC said that "in spite of our survey showing an improvement in export balances, the UK’s lackluster export performance and severely adverse current account balance, continue to act as drag anchors on GDP growth."
Despite the current round of softer economic surveys, growth in 2015 is expected to remain steady. Weak inflation should continue to boost domestic spending and, despite a sudden decline in the third quarter of 2014, BoE economists expect business investment to pick up this year.
In an interview with the Wall Street Journal on Monday, the BoE's rate-setter Kristin Forbes said growth in the US and UK is set to keep momentum this year as low inflation should boost spending and investment. This should in turn result in stronger argument for an earlier rate hike than many people think at the moment.
The UK labor market is predicted to tighten further throughout this year and unemployment should continue to fall, while wage growth is expected to strengthen well above inflation although still below the pre-crisis levels.
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