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The UK economy failed to grow in the fourth quarter, but this is 'old news' for markets. Optimism has increased among businesses, and while this may not fully translate into faster growth, we think it would take a more material deterioration in UK activity to convince the Bank of England to cut interest rates, according to the latest research report from ING Economics.
Consumer spending grew only marginally, reflecting weak demand over Christmas, while business investment fell by 1 percent - much more than expected, even considering the uncertainty surrounding Brexit and the general election.
This means that capital expenditure is only 1.3 percent higher in level terms than at the time of the 2016 referendum. By contrast, the US, Germany and Japan have all recorded double-digit growth since then, based on the closest comparable data, the report added.
The question now is whether this improved sentiment will filter into the dataflow. It is possible to see an improvement in consumer spending this year, given that wage growth has been strong at a time where household energy costs are set to drag inflation lower. That said, the global coronavirus outbreak is a clear risk to spending over the next few months were it to spread more widely.
"The bottom line is that we aren’t expecting economic growth to speed up dramatically this year. However it is important to remember that the Bank of England isn’t either. Its forecasts pencil in 0.2 percent growth in the first quarter, and 0.3 percent in the second. Barring a more material deterioration, we think policymakers will remain reluctant to cut interest rates. We currently forecast rates on hold through the rest of 2020," ING Economics further commented in the report.
