U.K.'s Worst Growth Since 2012 Sinks Pound on Rate Hike Doubts
(Bloomberg) -- The U.K. economy registered its worst performance since the end of 2012 in the first quarter, fueling speculation that the Bank of England will refrain from increasing interest rates next month.
The pound fell as investors further pared back bets on a hike in borrowing costs that had been seen as a near-certainty until last week, when Governor Mark Carney first sowed the seeds of doubt on whether his institution would deliver it. The Office for National Statistics said gross domestic product barely rose in the initial three months of 2018, with growth of only 0.1 percent.
The figures are “probably the final nail in the coffin for the chance of an interest-rate hike in May,” said Paul Hollingsworth, a senior U.K. Economist at Capital Economics in London. “This slow patch should prove to be transitory, if past experience is anything to go by. Nonetheless, the MPC is unlikely to be confident enough in two weeks’ time that there isn’t some underlying weakness too.”
Capital Economics and analysts at MUFG no longer think that the BOE will hike interest rates in May.
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While there was some impact on growth from weather -- as snow hit retail sales and disrupted building work -- statisticians said the overall effect was limited, raising questions over the underlying strength of the economy. The BOE had predicted growth would slow to 0.3 percent last quarter -- the same as economists in a Bloomberg survey before Friday’s data.
The data highlight the challenge policy makers face in raising borrowing costs as the economy cools and the U.K. disentangles itself from the European Union. Inflation has accelerated since Britain voted to quit the bloc in 2016, sending the pound plunging. With the currency effect unwinding faster than the BOE expected, and growth slowing, the logic behind further rate hikes is unraveling.
The pound fell as much as 0.8 percent against the dollar to touch the lowest since March after the report, and the implied possibility of a rate increase next month fell to below 25 percent from 56 percent on Thursday.
What Our Economists Say:“We now think the committee will pass up the chance to hike in May. The possibility that today’s data is a sign of weaker underlying growth, plus the faster drop off in CPI inflation seen in recent releases, provides enough uncertainty about where inflation could settle in two years’ time to hold off for now.”
--Jamie Murray and Dan Hanson, Bloomberg Economics
A move had been seen as a near-certainty until Carney used a BBC interview last week to note the recent weak economic numbers and said that policy makers are conscious there will be other chances to raise rates this year. A hike is now not fully-priced in until the fourth quarter.
“There is a question about -- if the MPC is on the margin, on the border of deciding whether to move on rates in May, whether this tipped them over or not,” said Victoria Clarke, an economist at Investec. “It will make them feel more nervous, if they’re already in discussions about whether May is the right time to move anyway. It certainly makes us less confident in that view that we will get a hike.”
The figures are the latest to show the damage bought by the Beast from the East snowstorm that sparked travel chaos from the end of February. Early returns show construction falling 2.3 percent in March as projects were put on hold. Services and industrial production grew just 0.1 percent, with the latter being boosted by increased domestic energy consumption during the freeze.
Still, the ONS said it was hard to estimate precisely how much the weather cost the economy, noting that there was a “small” impact on retail sales and construction but little effect elsewhere. Consumer-facing industries continued their weak trend, it said.
“Today’s data reflects some impact from the exceptional weather that we experienced last month, but our economy is strong and we have made significant progress,” U.K. Chancellor of the Exchequer Philip Hammond said in an emailed statement. “Our economy has grown every year since 2010 and is set to keep growing, unemployment is at a 40 year low, and wages are increasing.”
In the first quarter, services growth slowed to 0.3 percent, construction output fell 3.3 percent and industrial output rose 0.7 percent. While manufacturing growth slowed sharply to 0.2 percent, there was no evidence of a weather impact, the ONS said.
Still, at 0.1 percent growth, the economy is running well below the BOE’s estimated 1.5 percent annual “speed limit,” reducing the risk of the economy overheating. Annualized growth was 0.4 percent, the weakest since 2012, and compared with a forecast 2 percent in the U.S., suggesting that, as in 2017, the U.K. is likely to lag behind its international peers.
“The latest GDP figures confirm what we have been saying for some time: the U.K. is stuck in the global growth slow lane, while other countries race ahead,” said Adam Marshall, director general of the British Chambers of Commerce. “While the ‘Beast from the East’ clearly had an impact in the first quarter, the underlying slow-growth trend is real cause for concern.”
The latest figures are based on less than half the data that will eventually be available, and weather-affected quarters are notoriously volatile. In the fourth quarter of 2010, an initially estimated contraction of 0.5 percent was subsequently revised to show growth of 0.1 percent.
But the initial report did nothing to turn the BOE more dovish, with three Monetary Policy Committee members actually calling for higher rates in February 2011.
Last month, the MPC split once again, as policy makers Michael Saunders and Ian McCafferty began a fresh push to raise rates, warning of inflationary pressures building in the labor market.
©2018 Bloomberg L.P.