UK grows 0.8% in first quarter with inflation hawks expected to push for rate rises early next year

29th April 2014

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The UK economy grew by 0.8% in the first quarter of 2013 compared with growth of 0.7% in Q4 2013. The Office for National Statistics says that output increased in three of the four main industrial groupings within the economy in Q1 2014 compared with Q4 2013.

Output increased by 0.9% in services, 0.8% in production and 0.3% in construction though it decreased by 0.7% in agriculture. Gross Domestic Product is estimated by the ONS to be 0.6% below the peak in Q1 2008. From peak to trough in 2009, the economy shrank by 7.2%.

However GDP was 3.1% higher in Q1 2014 compared with the same quarter a year ago.

The ONS says there was some evidence to suggest construction output was affected by the storms and high rainfall in January and February but the ONS has not classified them as a “statistical special event”.

Schroders European economist Azad Zangana says the estimate has fallen short of the City consensus of 0.9% but more hawkish members of the Monetary Policy Committee may start talking of rate rises.

” Quarterly year-on-year growth is now up to 3.1% – the fastest rate of annual growth since fourth quarter of 2007. The level of GDP is now just 0.6% below its previous peak in Q1 2008.

“Within the details, the services sectors were the main drivers of the headline figures, growing by 0.9% on the quarter. The production industries grew by a solid 0.8%, but the construction sector only managed 0.3% while the small agricultural sector declined by 0.7%. The latter two being hit by the flooding in February, but should bounce back in the near future.

“Overall, these are good results for the UK economy and they confirm that the UK is one of the fastest growing economies in the advanced world. Looking ahead, we expect the economy to maintain a strong pace of growth, driven by loose credit conditions, low interest rates, and easing fiscal austerity. The rebound in the housing market is helping to boost household spending, while companies appear to be gaining in confidence and so are starting to increase levels of investment.”

Stewart Robertson, Senior Economist at Aviva Investors, says: “It seems quite plausible that the UK will indeed be the fastest growing G10 nation in 2014 as the IMF and OECD have suggested.

“How quickly times change. A year ago we were worried about a triple-dip recession, which never happened, and there was fierce debate about fiscal austerity driving the UK economy back into stagnation. Today, the economic revival is well-established, although it would now be nice to see greater contributions from investment and exports and a little less from housing and the consumer. That looks possible for the rest of the year, but it is not yet assured.

“In our view, the recovery will continue during 2014 and 2015 and will eventually require the Bank of England to start raising UK interest rates, although the first increase still looks likely to come sometime in Q1 or Q2 next year.”

Prospects of interest rate rise

“Taken together with the recent good news in the labour market, we could see the more hawkish members on the Bank of England’s Monetary Policy Committee suddenly find their voices, and begin to talk about raising interest rates. We continue to expect no change in interest rates this year, however, if the momentum in activity continues at this pace, there is a big risk the first interest rate rise comes in 2015.”

The TUC argues that the recovery is not strong enough to cope with an interest rate rise.

General Secretary Frances O’Grady says: “This is the kind of growth we could have seen two or three years ago if the government had not choked off recovery through cuts, austerity and wage freezes.

“But however welcome these figures are the economy remains below its 2008 peak and most people have yet to see much benefit from growth. Pay and job prospects are still below pre-crash levels, and there will need to be many more years of figures like today’s, before ordinary families recover lost ground.

“The worst possible conclusion from today is to believe that the recovery is now strong enough to survive higher interest rates.”

Impact on sterling

Andy Scott, associate director at foreign currency specialists, HiFX, says: “Sterling dipped across the board Wednesday morning following the release of the preliminary estimate of first quarter GDP growth. Expectations were for growth of 0.9%, fairly high when you consider that this time last year the economy just escaped a triple-dip recession. Figures came in at a very healthy 0.8%, especially considering that we saw large parts of the country under water in February which would have impacted activity, particularly agriculture. Sterling fell by just under 0.5% against the US dollar to 1.6800 and a similar amount against the euro to 1.2110.

“Sterling has performed well over the past 12 months on the back of continual positive economic news flows. Currently it is around 8% higher against the dollar and 3% higher against the euro which has also fared quite well due to the ending of the sovereign debt crisis that gripped the Eurozone in 2012. Our outlook going forward is for the dollar to begin to recover some ground against the pound as the U.S. economy bounces back from the impact of the arctic weather in the first couple of months of the year and unemployment continues to decrease.

He adds: “Against the euro though, we feel the pound will continue to strengthen further still as the European Central Bank faces down a battle of incredibly low inflation and marginal economic growth in most countries that use the single currency. Wednesday’s inflation numbers from Europe will potentially increase or lower the prospect of actual Q.E.  by the ECB but at the least we’re looking at the strong possibility of a small interest rate cut and no hikes for the foreseeable future. This will leave the ECB behind the curve as the U.K. and U.S central banks look likely to begin increasing rates next year which will weaken the Euro, something the ECB would be happy to see happen.”

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