Economic data from the UK was mixed last week as both the wage data and the GDP data were released over the week. However, the British pound emerged stronger mostly on the back of weakness in the U.S. dollar.
UK GDP expands at the slowest pace in five years
Data from the ONS showed last week that that the UK’s economic expansion fell to the slowest pace in five years. The GDP data underscored the uncertainty linked to the Brexit negotiations with Britain unlikely to reap the full benefits of the recent uptick in global demand.
Data from the ONS showed that the UK’s economy expanded at a pace of 0.5% on the quarter ending December 2017. On an annualized basis, this translated to an annual GDP growth rate of 2.0%, compared to the same period last year.
Comparing to the previous quarter for the year, the fourth quarter expansion registered the fastest quarterly pace of expansion. Economists polled had forecast a growth rate of 0.4%. Overall, the economy was seen expanding 1.8% which marks the slowest pace since 2012.
The slow pace of growth in the British economy is in stark contrast to other developed economies which are experiencing robust growth. The recent uptick in demand also led the International Monetary Fund (IMF) to raise its global growth forecasts. According to the IMF, the global economy is set to accelerate this year.
Last week’s GDP data showed that the U.S. economy expanded at a pace of 2.6% for the year 2017. The Eurozone economy is expected to expand around 2.4% on average for the year. This puts the UK’s economy lagging behind the Eurozone.
Despite the weak pace of economic expansion, growth in the UK remains resilient and the data was above estimates set by the Bank of England. The BoE had forecast that the UK’s economy would expand only 0.8% on the year. Most of the expansion was attributed to the better than expected performance in the manufacturing sector while services sector continued to chug along at a steady pace.
For the year ahead, the uncertainty from the Brexit negotiations makes it uncertain on how the economy will perform. The Brexit talks could potentially influence the trade relationship between the UK and the EU which happens to be the UK’s largest trading partner.
Business investment in the nation was also seen falling as investors were uncertain on which way the talks could end.
On the consumer side, which remains a key growth driver for the UK have continued to take a hit last year. With inflation surging past the Bank of England’s 2.0% target rate and only now showing signs of peaking around 3.10%, wage growth has remained broadly flat.
Last week’s wage data showed that average earnings excluding bonuses rose 2.5% on the year. Although this was a modest improvement from the previous data, wage growth continued to lag behind inflation.
With the Bank of England also hiking rates in November, the higher prices amid low wages continue to put pressure on the UK households. This could potentially transform to weaker spending in the coming months.
The weakness was evident by the fact that retail sales data for last year showed the slowest pace of expansion in four years. December 2017’s retail sales data posted the weakest growth sales since June 2016 which was when Britons had voted to leave the EU.
For the moment, the wage growth data and the GDP data continue offer some breathing space for the Bank of England. Interest rates are expected to remain steady in the near term, but speculation is rife that the BoE could start to hike rates towards the end of this year.
Inflation forecasts also suggest that the UK’s consumer prices could fall to 2.5% from the current levels. But this puts inflation above the BoE’s inflation target rate.
The Bank of England will be meeting next week for its first monetary policy meeting of the year.