U.K. economic growth accelerates in Q1 2019, economy unlikely to sustain rapid growth rate

The preliminary estimate of U.K.’s first quarter economic growth was released today. The data showed that the GDP growth picked up pace in the March quarter, accelerating to 0.5 percent on a quarter-on-quarter basis. This shows a considerable acceleration from the 0.2 percent growth seen in the prior quarter. On a year-on-year basis, the GDP growth accelerated to 1.8 percent from 1.4 percent previously. In spite of the PMIs pointing to growth in the first quarter being close to zero, the outturn was consistent with market expectations and also the latest guidance from the Bank of England’s inflation report.

Still, it is unlikely that the U.K. economy will be able to sustain such a rapid rate of growth, especially when much of the acceleration in the first quarter possibly reflected the impact of companies preparing for a potential ‘no-deal’ Brexit around the end of March, noted Lloyds Bank in a research report. This influence was pretty evident in the surge in inventories, as companies tried to limit the damage that might have occurred from a material disruption in supply chains. The rise in stock throughout the first quarter alone contributed 0.7 percentage points to GDP growth. Nevertheless, the associated rise in imports signified that the overall effect on GDP growth was possibly lower.

“With the UK securing an Article 50 extension through to the end of October, it is likely that the rate of stockbuilding eases back somewhat in the coming months, which would drag on growth in subsequent quarters”, said Lloyds Bank.

In the meantime, the sequential growth rate decelerated sharply throughout the quarter. In fact, in March, the economy contracted 0.1 percent after recording a growth of 0.2 percent in February and 0.5 percent in January. If it had not been for another solid rise in manufacturing activity, an even bigger fall in March GDP would have been seen, especially with output at both service sector and construction companies contracting on the month. This loss in economic momentum throughout the first quarter signifies that the headwinds facing the economy at the beginning of second quarter are solid.

Furthermore, the 0.5 percent quarter-on-quarter rise in business investment in the first quarter looks unusual and contrasts with business surveys that imply that investment intentions continue to be soft because of ongoing Brexit uncertainty.

“With the timing and nature of the UK’s withdrawal from the EU still unclear, and even less clarity over what shape and form the UK’s future relationship with the EU will take, it is highly unlikely that the pick-up in business investment seen in Q1 will be sustained”, stated Lloyds Bank.

Still, the fact that spending by households accelerated in the first quarter is a positive and implies that underlying consumption in the economy might be holding up better than expected.

“With the unemployment rate at its lowest since 1975 and demand for labour still holding up, it is likely that the UK labour market continues to remain tight. This dynamic, along with some further increases in wage growth, should ensure that the UK economy can continue to grow. However, it is likely that growth in the economy is likely to remain somewhat unbalanced”, added Lloyds Bank.

At 12:00 GMT the FxWirePro's Hourly Strength Index of British Pound was bearish at -78.5502 while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -68.8814 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex