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UK CommentWeak GDP numbers make May hike less likely

  1. GDP growth down to 0.1% in Q1 from 0.4% in Q4
  2. Effects of bad weather generally small
  3. Services and IP pulled up, while construction saw its largest fall since 2012
GDP growth down to 0.1% in Q1 from 0.4% in Q4
UK GDP growth was much weaker than expected in Q1. In the quarter, GDP was up just 0.1 percent after growing by 0.4 percent in Q4 of last year. The consensus expectation was for quarterly growth of 0.3 percent and the Bank of England also expected 0.3 percent. The y-o-y growth rate fell to 1.2 percent in Q1 from 1.4 percent in Q4. The Q1 GDP growth rate was the slowest since Q4 of 2012 and while bad weather had negatively impacted construction and retail sales, the effects were generally small, according to the ONS.
Services and IP pulled up, while construction saw its largest fall since 2012
Industrial production had increased by 0.7 percent in Q1, buoyed by strong growth in energy production due to below-average temperatures. Manufacturing growth slowed to 0.2 percent. Industrial production contributed 0.1 percentage points (p.p.) to GDP growth in Q1, up from 0.06 p.p. in Q4. According to the ONS, there is no evidence to show that the fall in the manufacturing growth in Q1 was due to the effects of the snow. The services industry grew by a mere 0.3 percent in Q1, contributing 0.2 p.p. to overall GDP growth, down from 0.3 p.p. in Q4. The services industries were broadly unaffected by the snow except for retail trade, and the business services and finance sector continued to be the main driver of growth in the sector. While some of the Q1 weakness was weather related, it seems the underlying trend in services output continues to deteriorate. Construction output fell by 3.3 percent in Q1, pulling GDP growth down by 0.21 p.p., after sidelining in Q4. This was the weakest quarterly growth since Q2 of 2012. The large fall followed strong growth in December and, while there was some evidence of an impact of the bad weather, output had fallen across all three months of the quarter, not just during the period of bad weather, according to the ONS.
BoE will probably rethink its May hike
To sum it up, GDP growth in Q1 was weaker than market expectations and also weaker than the Bank of England had assumed. Bad weather was somewhat to blame, but the underlying trend also seems to be weaker than expected. Up until now, we have expected the Bank of England to hike the policy rate in May. However, given Carney’s recent comments and today’s weak GDP numbers, on top of weaker-than-expected inflation, a May hike looks much less likely now, in our view.



Kari Due-Andresen

Chief Economist Norway

Norway and UK

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