Sterling slips as growth and services data disappoints, savings ratio surges

UK economic growth slowed to a four-year low in the second quarter of the year, part of a deluge of official figures on Friday that send the pound tumbling, also including a soft start to the third quarter for the services sector and a widening of the current account deficit.

Gross domestic product for the second quarter of 2017 was up only 1.5% compared to the corresponding period last year, down from the initial estimate of 1.7% and the lowest annual growth in fourth years.

The Office for National Statistics, however, said that compared to the first quarter of this year, the second quarter's growth remained at 0.3%, as expected.

Within the second quarter there were encouraging signs, with quarterly growth in household spending revised up to 0.2% from 0.1%, and business investment to 0.5% from 0%.

While the services sector was the only positive contribution to growth in the second quarter, the ONS revealed that the index of services decreased 0.2% during July, mostly from the transport, storage and communication sector.

National Accounts data from the ONS revealed the household saving ratio picked up to 5.4% in the second quarter, the highest since the third quarter of last year, while the ratio for the first quarter was revised to 3.8% from 1.7% as part of a methodology change that saw the household saving ratio revised up on average by 0.9 percentage points between 1997 and 2016.

The current account deficit widened to 4.6% from 4.4% between the first and second quarter of 2017.

REACTION AND ANALYSIS

Sterling fell 0.5% against the dollar to 1.3377 and almost 0.6% on the euro to 1.1340.

This painted a "less encouraging picture about the economy’s efforts to rebalance towards the external sector", said Capital Economics UK economist Paul Hollingsworth, with the methodological changes seeing the current account deficit revised wider for 2016 as a whole, to 5.9% of GDP from 4.4%.

He said while July’s services data suggested that the economy got off to a slow start in the third quarter, this followed two fairly solid months of expansion, and the survey data suggests the sector has not lost too much momentum, while the manufacturing sector looks to have performed much better.

"Overall, the fact that the latest data show households in a more robust position supports our view that consumer spending growth won’t slow too sharply, helping the economy overall to maintain a fairly solid pace."

While UK quarter-on-quarter GDP data was in line with the market expectations, analyst Naeem Aslam at Think Markets said the surge in the savings rate "clearly showing that consumers are not willing to spend on any big-ticket items".

"This has pushed the sterling lower against the dollar. The Brexit woes are the primary reason for this higher saving rate."

However, he highlighted the business lending number as "good news".

On balance, said Sam Tombs at Pantheon Macroeconomics, Friday's data are "a setback" for the hawks on the Bank of England's Monetary Policy Committee arguing that higher rates are needed to cool the economy immediately.

Positives were a healthier expenditure breakdown for GDP, with a higher contribution of net trade and better business investment and higher growth in households’ spending - although the increase is still the smallest since late 2014.

"The economy, however, has got off to a very poor start in Q3," he said, with the fall in the index of services, leading to a drop in his monthly GDP index, derived from the industrial, construction and services output data, by 0.2% month-to-month in July.

"Crucially, GDP growth is not on track to exceed the MPC’s 0.3% quarter-on-quarter forecast in Q3, as the hawks argued at the September’s meeting. Note that the preliminary estimate of Q3 GDP will be released just one week before the MPC’s meeting on November 2."