GDP grows more than expected to give green light for BoE rate hike
The UK economy grew slightly more than expected in the last quarter, official estimates revealed on Wednesday, paving the way for the first Bank of England interest rate hike in over a decade.
Gross domestic product grew 0.4% in the third quarter of 2017, the Office for National Statistics said in its preliminary estimate release, up from 0.3% in the first two quarters and ahead of the Bank of England’s and the consensus forecast for another underwhelming dose of the same.
Compared to the third quarter last year, UK GDP was 1.5% higher, which again was more than the 1.4% improvement economists had forecast.
While still a pretty subdued performance compared to the UK's peers, an outturn over 0.3% was felt by economists as likely to be the final piece of data needed to seal an interest rate hike from 0.25% to 0.5% from the BoE's Monetary Policy Committee when it meets next week.
The dominant services sector increased by 0.4% for a second quarter, with a strong performance in computer programming, motor trades and retail trade.
A return to growth for manufacturing of 1.0% boosted the total, while construction contracted for the second quarter in a row, falling into recession with a 0.7% fall in output.
The pound gained 0.3% against the dollar to 1.3173 on the news.
"Today’s GDP figures revealed that the economy re-gained a bit of momentum in the third quarter and have probably sealed the deal on an interest rate hike next week," said Ruth Gregory at Capital Economics.
She acknowledged growth was not particularly broad based, but was encouraged that industrial production appears to be reflecting the strength of soft data surveys, and that services was holding steady in the face of the ongoing real pay squeeze.
"The Q3 figures leave the economy on track to grow by about 1.6% this year. Looking ahead, with inflation likely to fall in 2018, the worst of the real pay squeeze should soon be behind us. And sterling’s decline, along with robust global growth, should boost net trade over the coming quarters."
Capital Economics expects three further 25bp increases in rates in 2018, though the firm is a lot more hawkish than most of its peers.
Economist Ben Brettell at Hargreaves Lansdown agreed the data "seem to have increased the likelihood of an interest rate rise next week", with market confidence having grown on the back of recent hawkish comments from the MPC.
"Yet if rates do rise as expected, the move will be largely symbolic – though it will be the first rise in over 10 years. A 25 basis point increase merely reverses last year’s cut – which was arguably unnecessary – and returns rates to where they’ve been for the entire post-crisis period. I expect the Bank to proceed with caution from here."
Sam Tombs at Pantheon Macroeconomics was one of many to agree the MPC is unlikely to begin a conventional tightening cycle.
"At this stage, we see no compelling reason to expect GDP growth to be revised down; the assumptions that the ONS has made for output in all sectors in September look plausible," Tombs said.
"GDP growth, however, is liable to slow again over the next couple of quarters. Real household disposable incomes still have further to fall in the near-term as retailers push through further sterling-related price rises.
"The lack of substantial progress in Brexit negotiations means that more firms will start to activate contingency plans and delay investment. The economy also will be hit next year by a re-intensification of the fiscal squeeze and a sharp rise in borrowing costs when the Term Funding Scheme is wound-up in February.
"As a result, we think it could be another 12 months from November before the economy is strong enough for the MPC to raise interest rates a second time."