UK growth at 4-year low as BoE eyes rate hikes

Britain’s economy grew at its slowest pace since 2013 in the 12 months after last year’s Brexit vote, data showed yesterday, painting a subdued picture as the Bank of England prepares to raise interest rates for the first time in a decade.

The world’s fifth-biggest economy was just 1.5% bigger than a year earlier in the second quarter, the weakest year-on-year expansion in more than four years and down from a rate of 1.8% in the first three months of the year.

Britain’s Office for National Statistics (ONS) had previously estimated second-quarter growth at 1.7%, and none of the economists polled by Reuters before the data had expected such a big downward revision.

Yesterday’s data also showed a monthly fall in output for the services sector in July, boding poorly for third-quarter UK growth.

Sterling fell after the data and prompted some economists to reconsider their prediction of a rate hike at the end of the BoE’s next meeting in early November.

“I‘m sticking to my call for a hike in November, but I‘m much more nervous now than I was prior to this data release,” Scotiabank’s Alan Clarke said.

However, the weak data might not stand in the way of Bank of England raising interest rates from their record low 0.25%.

Governor Mark Carney said yesterday the British economy was on track for a rate hike “in the relatively near term”, two weeks after the Bank of England jolted markets by flagging a rate rise “in the coming months,” despite weak growth this year.

The Bank of England has downgraded its estimate of how fast Britain’s economy can grow without generating excess inflation because of the impact of Brexit, so yesterday’s weaker growth picture is not necessarily fatal for the chances of a November rate rise.

A major annual set of revisions of Britain’s official data showed show stronger business investment, net exports and household savings, but also a larger current account deficit.

Britain sucked in £23.2bn of foreign finance in the three months to June, far above economists’ £16bn forecast, and the first-quarter deficit was revised up to £22.3bn from £16.9bn.

Business investment grew by an annual 2.5% in the second quarter, compared with an earlier estimate that it had stagnated, and households’ savings ratio was a relatively healthy 5.4% in the second quarter.

Nonetheless, the broader picture remains one of consumers under pressure from a steep rise in inflation caused by the fall in the pound since last year’s Brexit vote.

UK disposable income has fallen year-on-year for the last four quarters, the longest period since 2011.

Overall quarterly GDP growth was unrevised at 0.3%, and the services sector — which makes up 80% of the UK economy — contracted by 0.2% in July.

Meanwhile, European Commission chief Jean-Claude Juncker yesterday said that only “miracles” can move Brexit talks far enough to fulfil Britain’s hopes of launching discussions next month on its future ties with the EU.

“By the end of October, we will not have sufficient progress,” Mr Juncker said. “At the end of this week, I am saying that there will be no sufficient progress from now until October unless miracles will happen.”