UK GDP Growth Worst Since 2012

The UK economy grew by just 1.4% in 2018, the lowest recorded in six years, as GDP growth slowed to 0.2% in the fourth quarter. But some economists expect a 2020 bounce

David Brenchley 11 February, 2019 | 12:08AM
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London, UK economy, UK GDP growth, Brexit, interest rates

Brexit uncertainty continues to weigh on the UK economy, as GDP growth slowed significantly to 0.2% - or 0.17% to two decimal places – in the fourth quarter of 2018, down from 0.6% in the previous three months, according to the Office for National Statistics.

Annual GDP growth of 1.4% was the lowest recorded since 2012 and down from 1.8% in 2017, with the economy contracting by 0.4% month-on-month in December.

The pound quickly rebounded after an initial fall on the “shockingly poor” data, says Joshua Mahony, senior market analyst at IG, “with markets largely expecting the worst at the moment”.

Brexit was not the only event that contributed to the figure, though. "Economic troubles across the European Union, still our biggest trading partner, are dampening industrial production and export growth," says Jake Robbins, fund manager at Premier Asset Management.

This is reflected in steep falls in the production of cars and steel products, combined with slowing construction sector activity. The services sector was a rare bright spot, with health, management consultants and IT all doing well.

Business investment decreased for the fourth quarter in a row, this time by 1.4% quarter-on-quarter; more starkly, business investment dropped 3.7% year-on-year – the biggest fall since early 2010.

Ben Brettell, senior economist at Hargreaves Lansdown, describes business investment as “the most Brexit-sensitive element of GDP”. Therefore, he explains, “there’s little doubt Brexit uncertainty is responsible for the disappointing numbers”. That said, concerns over global trade wouldn’t have helped, either.

Household spending held up better than most areas, growing by 0.4% in the fourth quarter compared to 0.5% the three months before. “Even so, as the labour market has stayed strong and real wages are rising some Brexit uncertainty appears to be creeping into consumer spending,” says Paul Dales, chief economist at Capital Economics.

Brexit Uncertainty will Weigh in 2019

Economists aren’t expecting things to pick up any time soon. With still no idea as to how the UK will exit the European Union on March 29, businesses continue to take a wait-and-see approach. Expectations are for 2019 GDP figures to be similar, with the Bank of England having cut its forecast to 1.2%, from 1.7% before.

We’ve already seen a sharp deterioration in January purchasing managers’ indices (PMIs), meaning the next month-on-month figures could show an even bleaker picture, according to Mahony.

Helal Miah, investment research analyst at The Share Centre, adds: “Assurance over the political environment is needed sooner rather than later for businesses to release pent-up investment funds. The next few weeks and months will probably continue to see the malaise lead to reduced economic activity.”

Expectations of an interest rate rise before 2019 is out slipped from 44% to 34% after the Bank kept rates on hold last week. Mark Carney’s cautious tone looks prudent for now. But, on a longer-term view, Dales strikes a more positive tone.

“There is plenty of scope for the economy to bounce back once the Brexit uncertainty is removed,” Dales says. Indeed, agreeing with Miah, the activity that is currently on hold should be released if a deal is done.

Bounce and Interest Rate Rises Expected in 2020

Capital Economics is slightly more positive than the Bank of England on the UK economy for 2019, expecting GDP growth of 1.5%. But after that, they become much more bullish. The Bank predicts growth of 1.5% in 2020, but Dales thinks activity will surge to 2.2%.

As a result, he thinks interest rates will be hiked four times in 2020, ending the year at 1.75%. That would result in a strengthening of the pound to around $1.4 against the US dollar.

Without putting numbers on it, Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, agrees. She notes that had the referendum not occurred – or the result gone the opposite way – UK rates would be higher than their current level.

“It is worth remembering that the BoE was slated to be the first major developed central bank to normalise monetary policy, ahead of the US Federal Reserve,” Ward says. “We expect that if Brexit uncertainty is at least partially resolved then the Bank would like to see rates higher than their current low levels.”

Clearly, the big risk is the threat of a no-deal Brexit, which wasn’t completely ruled out at the previous vote on Prime Minister Theresa May’s deal with Brussels earlier this month. Should the UK crash out, Dales sees the Monetary Policy Committee cutting rates instead.

With the next “meaningful vote” penned in for February 26 – just over a month before the March 29 Article 50 deadline – the outcome is still anyone’s guess. Just as businesses and the Bank of England are taking a wait-and-see approach, so, too, are investors.

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David Brenchley

David Brenchley  is a Reporter for

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