UK growth still sluggish
July 26, 2017

Ongoing imbalances, the squeeze on households and weak growth should stop the Bank of England (BoE) from hiking rates any time soon, comments Schroders' Senior European Economist, Azad Zangana.

The latest figures from the Office for National Statistics show the UK economy saw a small pick-up in GDP growth, but the overall environment remains sluggish, he says.

The preliminary estimate shows second quarter GDP growth at 0.3 percent compared to 0.2 percent in the first quarter, and matching consensus expectations. To put the recent growth figures into context this is the slowest half-yearly growth rate since the start of 2013, he adds.

"Despite the government's efforts to 'rebalance the economy', the preliminary estimate shows that the services sector generated almost all of the growth recorded," he notes. "Meanwhile the wider production sector and the construction sector both contracted. Clearly, the depreciation in the pound has not significantly changed the fortunes of manufacturers.

"The biggest contribution with services came from the retail trade sub-sector, which is a slight concern given the squeeze on household incomes. As the retail trade sector includes both retailers and wholesalers, it is not clear whether there was a pick-up in consumption through retail sales, or just a rise in inventories.

"Higher household spending suggests the savings rate may have fallen even further from the record low recorded in the first quarter, which is surely unsustainable. Meanwhile, if there is a build-up in inventories, then there should be a fall in output in the future as destocking will be required.

"Overall, the latest figures are as expected, highlighting the weakness in the economy post the Brexit referendum. We forecast some improvement in the second half of the year as inflation starts to abate, but we doubt growth will return to above trend levels for at least a year.

"This suggests that employment growth should slow, and the unemployment rate may start to rise. Interestingly, the claimant count, which was once the preferred measure of unemployment by the government, has been rising in recent months.

"Looking ahead to the next BoE meeting on August 3, we think there is now a very low chance of a rise in interest rates. The weakness in growth combined with the recent downside surprise in inflation should calm the committee's hawkish tendencies."





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Ongoing imbalances, the squeeze on households and weak growth should stop the Bank of England (BoE) from hiking rates any time soon, comments Schroders' Senior European Economist, Azad Zangana.

The latest figures from the Office for National Statistics show the UK economy saw a small pick-up in GDP growth, but the overall environment remains sluggish, he says.

The preliminary estimate shows second quarter GDP growth at 0.3 percent compared to 0.2 percent in the first quarter, and matching consensus expectations. To put the recent growth figures into context this is the slowest half-yearly growth rate since the start of 2013, he adds.

"Despite the government's efforts to 'rebalance the economy', the preliminary estimate shows that the services sector generated almost all of the growth recorded," he notes. "Meanwhile the wider production sector and the construction sector both contracted. Clearly, the depreciation in the pound has not significantly changed the fortunes of manufacturers.

"The biggest contribution with services came from the retail trade sub-sector, which is a slight concern given the squeeze on household incomes. As the retail trade sector includes both retailers and wholesalers, it is not clear whether there was a pick-up in consumption through retail sales, or just a rise in inventories.

"Higher household spending suggests the savings rate may have fallen even further from the record low recorded in the first quarter, which is surely unsustainable. Meanwhile, if there is a build-up in inventories, then there should be a fall in output in the future as destocking will be required.

"Overall, the latest figures are as expected, highlighting the weakness in the economy post the Brexit referendum. We forecast some improvement in the second half of the year as inflation starts to abate, but we doubt growth will return to above trend levels for at least a year.

"This suggests that employment growth should slow, and the unemployment rate may start to rise. Interestingly, the claimant count, which was once the preferred measure of unemployment by the government, has been rising in recent months.

"Looking ahead to the next BoE meeting on August 3, we think there is now a very low chance of a rise in interest rates. The weakness in growth combined with the recent downside surprise in inflation should calm the committee's hawkish tendencies."



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