UK first-quarter GDP revised higher by ONS

UK economic growth in the first-quarter has been revealed as stronger than first expected, a final reading from the Office for National Statistics showed on Friday.

A final reading on UK gross domestic product was revised higher, up to 0.2% on a quarter-by-quarter basis from the initial 0.1% readings but still short of the 0.3% rate that the Bank of England's monetary policy committee calculated. Compared to last year, GDP was 1.2% higher, the same slowdown that was initially indicated from the 1.3% rate in the fourth quarter.

The final GDP reading showed construction revisions helped push growth higher on a quarter-on-quarter basis, as households borrowed more in the first quarter. The ONS said later construction data and significantly improved methods for measuring the sector had nudged up growth.

Household spending growth was left unchanged, at a fairly subdued 0.2% in the first quarter, which was almost entirely financed by a fall in the household savings ratio fell 0.4%, from 4.5% to 4.1% - the lowest in a year.

While quarterly growth in business investment was revised down to -0.4% from -0.2%, but net trade was shown to have made a slight positive contribution to GDP in the quarter, boosting GDP growth by 0.1 percentage point compared with a zero contribution previously. The current account deficit narrowed on the quarter from 3.8% of GDP in Q4 to 3.4%.

ONS head of GDP Rob Kent-Smith said the improved methods, introduced as part of ONS’s annual update to its figures, will lead to better early estimates of the construction sector with smaller revisions in the future.

“Overall, households were borrowers at the beginning of 2018 and for the sixth consecutive quarter, as households continued to face increasing prices, squeezing their budgets. Investment by both local and central government and the private sector fell, with spending on buildings, machinery and software all seeing notable falls.”

Economist Ruth Gregory at Capital Economics said the "backward-looking news is less important than the timelier data showing that the economy has gained further pace", with ONS index-of-services data also published on Friday showing a 0.3% monthly rise in output, suggested that the sector got off to a good start in the second quarter.

"And today’s household borrowing figures, which revealed a £1.4bn monthly rise in consumer credit suggests that consumers are still willing to borrow to smooth their spending in light of the ongoing weakness in real earnings. Overall, then, we remain cautiously upbeat about the economy’s near-term prospects and continue to think that the MPC will press ahead and raise interest rates at its next meeting on 2nd August."

Samuel Tombs at Pantheon Macroeconomics said the MPC will still have some reservations as growth rate still lags behind the committee’s expected 0.4% GDP growth in the second quarter, with the index of services data suggesting downside risks to the MPC’s forecast, with industrial and construction data also suggesting GDP was just 0.1% above its Q1 average in April.

"Three-month on three-month growth in the ONS’ new monthly GDP series is on track to be just 0.1% in May. This will be the latest data the MPC has at its key August meeting and we doubt that such modest growth will persuade a majority of MPC members that they need to raise Bank Rate immediately. We expect the eventual Q2 GDP figure to print at 0.3% and the MPC to wait until early next year to raise Bank Rate again."

Looking ahead, Tombs see a high risk of a further slowdown in growth in households’ spending, triggered by a renewed rise in saving, given that survey measures of saving intentions now are well above their long-run average, while recent surveys indicate growth in households’ real spending will remain weak.