Second estimates of GDP growth in the United Kingdom did not deliver any surprises as the data was in line with expectations. Quarter-on-quarter growth was unrevised at 0.5%, while the year-on-year rate was also unchanged at 2.3%.
However, the detailed analysis of GDP growth and its components shed some more light on the state of the UK economy, particularly, the growing deterioration of the UK’s trade situation. Exports grew by just 0.9% during the quarter as the stronger pound and weaker overseas markets weighed on UK manufacturers. The marginal increase in exports was more than offset by a 5.5% jump in imports, which was led by strong domestic consumption, causing the trade deficit to widen and deduct 1.5% from GDP growth during the quarter. The UK trade deficit stood at £14.2 billion in the third quarter, almost double the £7.7 billion deficit in the second quarter when a bigger increase in exports and a drop in imports had boosted growth.
Looking at the sector-by-sector growth, production output was revised lower to 0.2% q/q from 0.3% as manufacturing growth was revised down to -0.4% from initial estimates of -0.3%. Construction and services growth were left unrevised at -2.2% and 0.7% respectively.
Household expenditure continued to grow robustly and expanded by 0.8% q/q. Business investment was another bright spot, increasing by 2.2% over the quarter, in a sign that businesses are planning for higher production in the future. Government spending was also up despite the austerity measures, increasing by 1.3% q/q – the fastest rate since the second quarter of 2014.
The unbalanced nature of the UK’s economic recovery continues to complicate the job of the Bank of England, which risks damaging the manufacturing sector even further if they raise interest rates too soon and drive up the pound. However, with unemployment heading towards 5% and earnings growth picking up to 3%, it will be difficult for the Bank to keep rates at current levels for much longer, especially if British households continue to spend at the current pace.
It will be interesting to see what happens to inflation in the coming months once the effects of the oil price falls are dropped out of the CPI calculations as this would give the Bank of England less breathing space.
The pound fell against the dollar after the data as some analysts were expecting an upward revision to 0.6%. Sterling hit a low of 1.5030 dollars before rebounding slightly to 1.5045 dollars in late European session. It saw a more limited reaction against the euro though, as the pair fluctuated within a range of 0.7029 – 0.7049 for much of the European session in thin trading. But the euro dropped below the range in late trading to decline to 0.7025 pounds.
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