The UK’s preliminary report on the first quarter GDP showed that the economy expanded at one of the weakest pace since 2012 in the first three months of the year. The data released by the UK’s Office for National Statistics (ONS) showed that GDP expanded at a pace of just 0.1% for the period.
The 0.1% increase in the economic activity comes just after the UK’s economy expanded at pace of 0.4% in the final quarter of 2017. The ONS said that the weaker pace of economic growth was not impacted by the hard weather in the months of February and March.
The British pound was seen falling sharply following the GDP report which dampened the outlook on an interest rate rise at the Bank of England monetary policy meeting in May.
Following the release of the GDP data, Rob Kent-Smith from the ONS said that “Our initial estimate shows the UK economy growing at its slowest pace in more than five years with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly.”
The ONS head of national accounts said that while snow had some impact on the economy especially in sectors such as construction and retail the overall effect was limited as it also helped to boost online sales.
Despite the weak pace of increase, some economists’ are hopeful that further revisions to the GDP data could see higher numbers. Still, the various leading indicators during the first three months of the year suggested a slowdown in growth across the manufacturing, construction and services sectors.
The preliminary GDP report was based on the data for March and therefore could be revised higher.
The biggest drag on the GDP came from the construction sector which posted a decline of 3.3% in the first three months of the year. Manufacturing sector slowed to a pace of 0.2% on the quarter. Even the consumer facing sectors faced a slowdown on account of higher inflation and slow pace of wage growth.
The GDP report comes just a week after the Bank of England Governor, Mark Carney signalled that interest rates could rise slowly rather than as expected on account of the uncertainty about Brexit and the slowdown in the UK’s economy.
The BoE initially gave an upbeat view at the monetary policy meeting in March. Back then, central bank officials had signalled that the next BoE rate hike would be in the month of May with one of the members voting for an interest rate hike at the March meeting itself.
However, with the recent slowdown in the GDP, BoE officials could remain cautious. That being said, other measures that the central bank has been targeting, namely inflation and wage growth have remained broadly in line with the BoE’s target.
Consumer prices in the UK began to fall after the Bank of England hiked interest rates by 25 basis points in November last year. The rate hike came amid inflation overshooting the BoE’s target inflation rate of 2.0% and reaching close to 3% at one point.
Since the November rate hike, consumer prices were seen easing with the recent data showing that inflation fell to 2.5%. This decline gave wage growth some room to improve. The most recent unemployment data from the UK showed that wage growth grew at a pace of 2.6%, marking one of the fastest pace of increase in wages in nearly two and a half years.
With the weak GDP report, interest rate hike expectations were seen weakening significantly. However, the BoE’s meeting is likely to garner a lot of attention with some parts of the economy supporting a rate hike while the other indicators suggesting a slowdown in the economy.