UK economy exceeds fourth-quarter forecasts as economists warn of slowdown
Economists had been expecting growth of 0.4%, according to consensus figures.
Britain’s economy performed better than expected in the fourth quarter thanks to the country’s powerhouse services sector, though there are warning signs of “slower and uneven” growth.
The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.5% in its initial estimate for October to December last year, following growth of 0.4% in the third quarter.
Economists had been expecting growth of 0.4%, according to consensus figures, though a minority had forecast a slowdown to 0.3% on the back of a temporary shutdown of a major North Sea oil pipeline last month.
The biggest impact came from the UK’s services sector, which accounts for around 79% of the economy and grew 0.6% quarter on quarter, driven by business and financial services from the likes of lawyers, architects and business administrators.
However, the ONS said longer-term trends were pointing to a broader slowdown.
ONS head of GDP Darren Morgan said: “Despite a slight uptick in the latest quarter, the underlying picture is of slower and uneven growth across the economy.
“The boost to the economy at the end of the year came from a range of services including recruitment agencies, letting agents and office management.
“Other services – notably consumer-facing sectors – showed much slower growth,” he said, referring to industries such as distribution, hotels, catering, transport and communications.
It comes amid a squeeze on consumer finances from higher inflation, triggered by the Brexit-induced collapse in the pound, and dismal wage growth.
“Manufacturing also grew strongly but construction again fell,” Mr Morgan added.
Sterling initially rose following the news, having made gains of 1% to just shy of 1.43 against the dollar and rising to 1.14 against the euro but enthusiasm waned by the afternoon.
The UK economy is still struggling to bounce back to levels seen in the final quarter of 2016 when GDP rose by 0.6%.
The release came shortly after Bank of England Governor Mark Carney admitted that the vote to leave the EU had cost the UK “tens of billions of pounds” in lost economic activity, blaming the “Brexit effect” for holding back investment in the UK.
“The economy is about a percentage point less in size than we expected before the vote at this point in time – by the end of the year, probably two percentage points,” he told BBC Radio 4’s Today programme.
However, he said the impact was likely to be “short term” and there was the prospect of a “conscious recoupling” with the international economy in the year ahead.
Over the fourth quarter, strong manufacturing activity helped fuel a 0.6% rise in production industries, but the ONS said that was partially offset by a “significant” fall in oil and gas extraction following the temporary shuttering of the North Sea Forties pipeline over the bulk of December.
Construction fell 1%, marking its third quarterly decline, while agriculture contracted 0.4%.
The ONS said the UK is likely to have seen economic growth of around 1.8% for the whole of 2017, a slightly slower rate than 2016 when it grew 1.9% and marking the weakest rate since 2012 when the economy expanded 1.5%.
Without Brexit, the UK economy would probably have expanded by around 2.5%, Kallum Pickering, senior UK Economist at Berenberg, said.
He said the pace of fourth-quarter growth is “probably a little above what the UK can sustain outside of the EU in the long-run. Along with the upside surprise to wage growth in the labour market data published earlier this week, the improving growth momentum makes the Bank of England’s ultra-accommodative policy stance even harder to justify.”
He is now expecting an interest rate hike by the Bank to 0.75% in the second quarter.