Britain's economic growth slowed sharply in the fourth quarter of 2018. The yearly growth was the slowest in six years, as Brexit worries and global trade tensions dampened activity.
Data showed that the nation’s GDP increased just by 0.2% up to December 2018.
Growth slowed down more than half from the third quarter when the economy advanced 0.6% back then. This was, however, the preliminary release by the ONS and the data is subject to revisions in the coming weeks.
Economists estimated that the U.K.’s economy would grow by 0.3% in the fourth quarter of 2018. However, the actual data came out lower than expected.
U.K.’s quarterly GDP growth, 2018
The U.K.’s economy had remained week for most of last year. Here is a summary of the U.K.’s growth figures every quarter in 2018.
On a year over year basis, the U.K.’s GDP was seen rising 1.3% in the fourth quarter of the year. This was the weakest pace of increase in GDP since the second quarter of 2012.
The annual growth rate of 1.4% was slightly lower compared to the 1.6% increase forecasted by economists.
Head of ONS GDP, Rob Kent, said that the slowdown in the fourth quarter's GDP came on account of weakness in the car manufacturing sector and a decline in steel production. The GDP decline was also accelerated by sharp falls in the construction sector as well.
The only exception was the services sector. Health, management and IT managed to offset some of the declines from the manufacturing and construction sectors.
For December, GDP fell by 0.4% during the month. This is somewhat better compared to the forecasts which showed that economists expected the U.K.’s GDP to stagnate.
There was a broad-based decline among sectors including construction, production, and services. This was also the first time that there was a decline across all the sectors since September 2012.
More sectors affected
One of the reasons for the U.K.’s sectors to post declines was due to Brexit. With the March 29th deadline looming, no deal in sight, and the U.K. parliament rejected the agreement twice, fears make sense.
The GDP reports come a week after the Bank of England held its monetary policy meeting. The BoE, while leaving interest rates unchanged, forecasts that the growth for 2019 would fall to 1.2% from the current 1.4% in 2018.
The 2019 GDP growth forecasts would be one of the slowest in a decade. The estimates scored much lower compared to the 1.7% growth that the central bank had forecast just as recently as the November 2018 monetary policy meeting.
U.K. government spending rises 1.4%
The Bank of England issued a warning that a no-deal Brexit would hamper the economic activity severely.
The slower output was also evidenced not just for the last quarter of 2018 but also for January. While the BoE noted that interest rates would rise in case of a Brexit deal, the chances for this remain slim at the moment.
Private consumption increased by only 0.4% on a sequential basis which scored better than the 0.3% forecasts. The government spending rose by 1.4% which was the biggest gain compared to the 0.5% increase that was forecast by economists.
The gross fixed capital formation declined by 0.5%. This was worse than the forecasts of a 0.2% decline. Exports increased 0.9% while imports rose 1.3% during the quarter. Both imports and exports were forecast to rise by 1.0% respectively.
Investment in businesses fell 1.4% on a sequential basis which was higher than the forecast of a 1.0% decline forecast by economists. Business investment decreased for the fourth quarter on a sequential basis indicating that businesses were wary of raising investments amid the Brexit uncertainty.
U.K. Manufacturing, Industrial production declines in December 2018
In a separate report, the Office for National Statistics (ONS) released other data covering the foreign trade, production, and services data for December.
Official reports indicated that the U.K.’s total trade deficit for December was 3.2 billion GBP. This was slightly higher than the median estimates of a 3.1 billion increase.
The visible trade deficit registered 12.1 billion compared to the consensus of 11.95 billion.
Industrial production fell 0.5% on a month over month basis in December 2018. This was worse than the forecasts of a 0.1% increase given by economists.
Manufacturing output fell 0.7% compared to expectations of a 0.2% increase while construction output fell 2.8% on the month and coming out worse than expected. The index of services fell 0.2% on the month.
Consumer prices slow down more than expected in January 2019
The recent consumer price index data showed that inflation eased more than expected on the year ending January 2019. Data released by the ONS showed that headline inflation fell to 1.8% on the year in January.
Economists polled had forecast that inflation would fall to 1.9%. In December 2018, the U.K.’s inflation rate scored at 2.1%.
The core inflation rate, which excludes the volatile food and energy prices registered a reading of 1.9% which matched with the consensus estimates and core inflation grew at the same pace as the month before.
The drop in inflation data comes as the Bank of England, in its recent monetary policy meeting forecast signaled that inflation would fall below the 2.0% inflation target rate in January while the central bank expected inflation to fall to 1.75% the actual reading was seen to be slightly better than expected but close to the forecasts.
The decline in inflation was partly due to the overall decline in crude oil prices. Energy prices have put a lid on the inflationary pressures. Furthermore, the British pound’s exchange rate has also stabilized from the lows since the 2016 Brexit vote, partly contributing to lower inflation.
Brexit on the agendas
The U.K. still has not struck a Brexit deal with the European Union, while the deadline for the March 29th looms ever closer. The British Prime Minister has maintained that there will not be a hard Brexit while the EU officials have kept that the deal was not up for negotiation.
The main sticking point with both sides has been the Irish backstop arrangement. PM May presented the Brexit deal twice to the U.K.’s Parliament which stood no chance leading to a vote of no-confidence in her leadership.
PM May managed to scrape through the no-confidence vote in her government and continues to seek a mutually agreeable Brexit deal that would be acceptable to both parties.
Negotiations should continue in the coming weeks.
While the negotiations continue, the effects trigger lower business investment and bleaker economic output. The slowdown in the U.K.'s economy also comes amid global growth slowing and the trade tensions with the United States and China.
A slowdown in China should hit almost all other major economies in the world which can a significant risk to economic growth, including the United Kingdom.