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UK economy slows sharply, investors cut bets on May rate hike

Economic IndicatorsApr 27, 2018 05:20AM ET
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© Reuters. A man walks accross Primrose Hill as dawn breaks behind construction cranes in the City of London

By David Milliken and Andy Bruce

LONDON (Reuters) - Britain's economy slowed much more sharply than expected in the first three months of 2018, with heavy snow only partly to blame, prompting investors to slash their bets on a Bank of England rate rise next month.

Britain's economy grew at its weakest pace since the end of 2012, expanding by just 0.1 percent in the first quarter of 2018, at the bottom end of economists' forecasts in a Reuters poll and well below the BoE's prediction of 0.3 percent.

Sterling plunged by around three quarters of a cent against the U.S. dollar and interest rate futures halved the odds on a May rate rise to less than a quarter from around 50 percent before the data .

"It clearly calls into question the prospect of a May rate hike," Commerzbank (DE:CBKG) economist Peter Dixon said.

The slowdown from modest growth of 0.4 percent in the fourth quarter of 2017 was driven by the biggest fall in construction output since the second quarter of 2012.

But the Office for National Statistics said on Friday that bad weather was not wholly to blame, with much of the fall in construction taking place in January.

"While the snow had some impact, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales," ONS statistician Rob Kent-Smith said.

Rare snow storms and sub-zero temperatures in late February and early March, dubbed "the Beast from the East", were already known to have hurt some businesses.

The scale of the slowdown may unsettle the BoE, which next week will start meetings to consider whether to raise interest rates on May 10 for only the second time since the 2008 financial crisis.

While the central bank had expected some impact from the bad weather, the figures suggest that a year of high inflation, and uncertainty about Britain's prospects once it leaves the European Union in March 2019, are taking a bigger toll on firms and consumer spending than expected.

Some central bank policymakers, however, have said early estimates of first-quarter GDP are often subject to upward revision, particularly at times of harsh weather.

Commerzbank's Dixon said the ONS did not have a great record of assessing the effect of weather on early estimates of GDP.

"If I were on the Monetary Policy Committee, I would say it's not a great number but it's not necessarily a reason not to hike rates," he said. "This is not 2009 and we don't need 2009 levels of rates."

At the start of April, economists had been pretty sure that the BoE would look past any weak first-quarter data because inflation has been running above its target and the unemployment rate is the lowest since 1975.

But in the run-up to Friday's data, many were beginning to think the BoE could be getting cold feet about a May rate rise, after Governor Mark Carney alluded to "mixed" data last week and the possibility of moving rates at a later meeting.

In year-on-year terms, the pace of growth slowed to 1.2 percent, its weakest since the second quarter of 2012 and at the bottom end of economists' forecasts in a Reuters poll.

In the final three months of 2017, Britain recorded the slowest year-on-year growth of any major advanced economy. For this year, the International Monetary Fund predicts Britain will move ahead of Japan and Italy in the rankings.

Britain's preliminary GDP data rely heavily on estimates by ONS staff and only contain about 40 percent of the data in the final estimate.

Official data last week had already shown a big fall in retail sales in March, and earlier on Friday housebuilders reported a sharp drop in new housing starts in the first three months of 2018.

UK economy slows sharply, investors cut bets on May rate hike

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