U.K. economic growth decelerates in Q4 2018, sharp turn-around in growth prospects looks limited

The economic growth momentum of U.K. decelerated in the fourth quarter of 2018. The preliminary estimated indicated that the U.K. economy expanded just 0.2 percent quarterly, a slowdown from third quarter’s 0.6 percent. A slowdown in the fourth quarter had been anticipated, especially given the weakening in business surveys throughout the quarter and based on an already-released monthly GDP data for October and November. Nevertheless, the slowdown was sharper than market expectations on a rise of 0.3 percent. Therefore the annual pace of economic growth decelerated to 1.4 percent in 2018 as a whole, a six-year low.

All three of the U.K. economy’s main areas shrank in December. The industrial sector contracted 0.5 percent, whereas construction and services sectors recorded a contraction of 2.8 percent and 0.2 percent. With business sentiment surveys indicating towards weaker activity trends at the beginning of 2019, the prospect of a significant recovery in the rate of growth in the first quarter look slim at this stage, noted Lloyds Bank in a research report.

The quarterly GDP data released today showed an expenditure breakdown where, as in previous quarters, the main driver continued to be the consumer. Household spending grew 0.4 percent quarterly throughout the fourth quarter, matching the third quarter’s growth rate. Government spending further underpinned the activity, recording a growth rate of 1.4 percent. Nevertheless, some offset came from a fourth straight quarterly contraction in business investment. Anecdotal reports and business surveys, have for some time underlined the impact that the ongoing uncertainty around the U.K.’s withdrawal from the EU is having on business investment. Based on the latest data, business investment throughout the whole of 2018 dropped 0.9 percent relative to 2017.

The near-term negative effect from Brexit on final demand was partially countered by a further rise in stockbuilding. Surveys such as the manufacturing PMI imply that much of this rebound is likely related to companies managing the uncertainty related to the terms of the U.K.’s withdrawal from the EU, rather than being an indicator of increased underlying output or demand growth. Furthermore, with a considerable proportion of these likely to be imported, the overall effect on U.K. GDP might be modest, stated Lloyds Bank.

“Looking ahead, based on the continued softening in business surveys at the start of 2019, on the face of it, a sharp turnaroud in the UK’s growth prospects looks limited. Still, the fact that much of the slowdown in business activity was linked to ongoing political uncertainty, suggests that there is some scope for sentiment to improve, particularly if the UK’s future with the EU becomes clearer”, added Lloyds Bank.

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