28th April 2015
As official figures reveal that the rate of economic growth halved to 0.3% in the three months to the end of March, the experts share their views on what it means for investors and the economy at large…
The growth rate hit the slowest quarterly level for two years and was down from 0.6% the three months to the end of 2014.
Calum Bennie, savings expert at Scottish Friendly, says: “The fall in GDP, the worst reading since the end of 2012 will come as a shock to many. This, combined with continuing low inflation may result in the need for further stimulus.
“Construction is blamed for the current fall. The increase in housebuilding that all major parties have pledged during the Election campaign could provide the stimulus required. If not, and GDP remains subdued, the concern for savers is that interest rates may be reduced.
“The GDP figures, while a setback for the Government ahead of the General Election, should not cause any immediate concern as the underlying figures show that the economy is still growing
“Those that have been able to prepare ahead and put money aside should feel comfortable they can weather any small volatility in the economy. However those who have chosen not to put away any disposable income during the recent spell of lower prices should heed this warning, that the trajectory of the economy is not always firmly upwards and so are encouraged to save any extra money they have.”
Ben Brettell, senior economist at Hargreaves Lansdown, says: “The magnitude of today’s slowdown comes as something of a surprise. Economists expected today’s data to show a marginal fall from 0.6% in the final quarter of 2014 to 0.5% in Q1 of this year. In fact the services sector grew at 0.5%, but the overall figure was dragged down to 0.3% by a 1.6% fall in construction output, a 0.1% fall in production and a 0.2% fall in agricultural output.
“Stewardship of the economy is a key battleground in the upcoming election. Overall the UK economy is about 4% bigger than its 2008 peak and has expanded 8.4% since the Conservative-led coalition took charge in 2010. However, today’s bigger-than-expected drop is sure to be seized upon by opposition parties as evidence the UK recovery is faltering.
“While today’s data is undoubtedly disappointing, it doesn’t represent cause for undue pessimism. This is a first estimate, produced by the ONS using less than half of the data which will eventually be available. As such it will be subject to revision in the months to come. Don’t forget that even the much vaunted double-dip recession in 2011/12 was eventually revised out of the statistics altogether.
“Forward-looking PMI (Purchasing Managers’ Index) survey data released earlier this month indicated a broad-based expansion, and indeed Markit (the company which conducts the surveys) had forecast growth of 0.7% in Q1. Given the positive recent PMI readings, it is entirely possible that today’s figure will eventually be revised upwards. Furthermore the data is likely show an improvement over the rest of the year. Real wage growth, helped by record low inflation, should keep consumer spending buoyant, and growth of 2.5-3% in the year as a whole looks achievable.
“The most recent Bank of England minutes noted that the decision to keep rates on hold was ‘finely balanced’ for two committee members. Today’s disappointing growth figures are likely to postpone any calls for higher rates for now.”
Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, says: “Sterling fell by around 0.5% against the dollar and the euro following worse than expected first quarter GDP growth numbers this morning. The first three months of 2015 saw the slowest quarterly pace of growth since the fourth quarter of 2012, with a sharp slowdown in business services and the finance sector. While the purchasing managers’ indexes have been picking up over the past three months, they appear to be indicating rising optimism about the outlook, rather than increased activity in the economy just now. There’s also the impact of the uncertainty of next month’s General Election which can cause businesses to delay new spending and expansion, while they wait to see which political party’s policies will be implemented.
“Looking at the annual growth rate of 2.4% and the bigger picture in terms of the UK economy, there’s still plenty to be upbeat about with unemployment at its lowest since 2008 and consumer confidence riding high. As highlighted by the Bank of England’s last minutes, the Eurozone is now showing signs of recovery and as our biggest trading partner, this bodes well for increased external demand. Whilst today’s data will support the view for UK rates to remain on hold this year, we still expect sterling to strengthen against the U.S. dollar this year.
“First quarter GDP from the US is out tomorrow and is forecast to show the economy grew very little. The latest data is also indicating the economy there is struggling to rebound from the slowdown, making a rate hike less likely. Against the euro, we feel sterling is going to struggle to move significantly above the recent highs of 1.4200, as we feel the euro is undervalued here. We also believe that the ECB’s Q.E. programme will continue to assist the Eurozone economies to recover and cause money to flow back towards the single currency.”