10 January 2019


UK economy rings in the new year on a soft note

The UK settled into a lower gear at the end of 2018, as the summer boost to Q3 growth faded away. GDP growth in the month to October was almost flat, and business surveys (from both the CBI and IHS Markit/CIPS) suggested that a tepid pace of expansion continued into December.

UK economy rings in the new year on a soft note

In the three months to October UK GDP growth slowed for the third quarter in a row, to 0.4%. This follows from a peak of 0.7% in the three months to July. The easing in growth was largely driven by construction output, transport & storage, distribution and hotels & restaurants – the latter two heavily exposed to the ongoing pressure on households’ budgets. Overall, the data made it clear that the economy retained little growth momentum going into Q4, following the summer boost seen in Q3: output grew by just 0.1% in the month to October, having been broadly flat since August.

The CBI’s Growth Indicator showed that private sector activity remained flat in the three months to December, and this trend was also reflected in the latest IHS Markit/CIPS PMIs. Although the composite PMI picked up slightly in December, it continued to signal one of the slowest rates of expansion since the EU referendum for the second month in a row.

UK CPI inflation ticked down slightly to 2.3% in November, which was the lowest rate of inflation in 20 months. The biggest downward pressure on inflation came from falling fuel prices (driven by the recent drop in global oil prices) and a range of “recreational and cultural goods”, such as video games. These were offset largely by increasing tobacco duties. Looking ahead, inflation is likely to continue falling gradually; however, uncertainty over the near-term outlook for inflation has risen slightly due to the ongoing volatility in sterling exchange rates and global oil prices.

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously in December to maintain the Bank Rate at 0.75%. The MPC’s guidance on the future path of rate rises remained unchanged: an ongoing tightening in monetary policy will be necessary to return inflation to target as long as the economy continues to evolve in line with its forecast. The MPC reiterated in the meeting minutes that their action in response to a no-deal Brexit would not necessarily be an automatic rate cut, depending largely on the balance of how this event would affect the demand and supply sides of the UK economy, and the corresponding impact on inflationary pressure.

The MPC also noted that it had slightly downgraded its outlook for UK GDP growth in Q4 2018 to 0.2% (from 0.3% in the November Inflation Report). They mentioned that Brexit uncertainty seemed to have intensified since their November meeting, which led to a tightening in financial conditions. Additionally, the MPC noted that the global economy slowed down more quickly than expected, driven by a softening in growth in advanced economies (particularly the Eurozone). They expect quarterly growth to remain at this level in Q1 2019, but also mentioned that Brexit uncertainty could lead to greater volatility in growth depending on how the negotiations affect consumer and business confidence.