UK GDP growth edged up to 0.5% quarter on quarter (q/q) in the fourth quarter of 2015 from 0.4% q/q in the third, but this was still below the growth rates that had prevailed throughout 2014 and meant that year-on-year growth dipped to its weakest pace since the first quarter of 2013. Growth in the fourth quarter was entirely dependent on the services sector.
IHS perspective | |
Significance | UK GDP growth edged up to 0.5% quarter on quarter (q/q) in the fourth quarter of 2015 from 0.4% q/q in the third, entirely due to the services sector expanding 0.7% q/q. There were marginal contractions in both industrial production (down 0.2% q/q) and construction output (down 0.1% q/q). |
Implications | Bank of England caution over raising interest rates any time soon is likely to be maintained by the GDP growth data for the fourth quarter of 2015, given that Governor Mark Carney has highlighted the need for sustained above-trend growth to lift domestic cost pressures and get consumer price inflation (just 0.2% in December) back up towards its 2.0% target level. |
Outlook | With the United Kingdom clearly finding growth hard to come by at the moment and facing significant domestic and global uncertainties, IHS is likely to trim its GDP growth projection for 2016 to 2.1% (from 2.2%) in its forthcoming February forecast. Growth is seen improving to 2.5% in 2017 on the assumption that the UK referendum on European Union membership (likely to be held some time between June and the end of 2016) results in a vote to stay in the bloc. |
A preliminary estimate from the Office for National Statistics (ONS) indicates that UK GDP growth edged up to 0.5% quarter on quarter (q/q) in the fourth quarter of 2015, from 0.4% q/q in the third. This followed growth of 0.5% q/q in the second quarter and 0.4% q/q in the first. Consequently, GDP growth was in a range of 0.4–0.5% q/q throughout 2015. In contrast, GDP growth was 0.6–0.8% q/q throughout 2014 and 0.6–0.9% q/q throughout 2013.
Year-on-year (y/y) GDP growth moderated to 1.9% in the fourth quarter of 2015, which was the weakest annual rate of expansion since the first quarter of 2013. This was down from 2.1% in the third quarter of 2015, 2.3% in the second quarter, 2.8% in the fourth quarter of 2014, and a peak of 3.0% in the second quarter of 2014. Overall, GDP growth came in at 2.2% in 2015, which was down from a nine-year high of 2.9% in 2014. Growth had also been 2.2% in 2013.
Growth in Q4 dependent on services sector
Uncomfortably for hopes of balanced UK economic activity, GDP growth in the fourth quarter of 2015 was entirely dependent on the services sector. Construction output contracted marginally, as did industrial production (with manufacturing output flat).
UK real GVA (bil. chain-linked British pound) | ||||||
Q/Q, % change | Y/Y, % change | |||||
Q4 2015 | Q3 2015 | Q4 2015 | Q3 2015 | 2014 | 2015 | |
Gross value added, total | 0.5 | 0.4 | 1.9 | 2.1 | 2.9 | 2.2 |
Agriculture | 0.6 | 0.2 | -1.8 | -0.1 | 14.3 | 0.7 |
Industry | -0.2 | 0.7 | 1.1 | 1.4 | 1.3 | 1.2 |
-Manufacturing | 0.0 | -0.4 | -1.0 | -0.9 | 2.7 | -0.1 |
Construction | -0.1 | -1.9 | 0.3 | 1.0 | 7.5 | 3.2 |
All services | 0.7 | 0.6 | 2.2 | 2.4 | 3.3 | 2.5 |
Source: Office for National Statistics, seasonally adjusted data | ||||||
Output in the dominant services sector expanded at an increased rate of 0.7% q/q in the fourth quarter, which was up from expansion of 0.6% q/q in the third quarter, 0.5% q/q in the second quarter, and 0.3% q/q in the first; it was up 2.2% y/y. Fourth-quarter service-sector growth was led by distribution, hotels, and catering (up 1.1% q/q and 4.4% y/y), while there was also robust q/q expansion in the business, services, and finance sector (up 0.9% q/q and 2.1% y/y). Output in the transport and communications sector was up 0.3% q/q and 3.4% y/y, while it increased 0.3% q/q and 0.4% y/y in government and other services.
However, industrial production edged down by 0.2% q/q in the fourth quarter, which was the first contraction in 2015 and limited y/y growth to 1.1%. Industrial production had previously expanded by 0.2% q/q in the third quarter, 0.7% q/q in the second, and 0.4% q/q in the first. Manufacturing output stabilised q/q in the fourth quarter after contraction in both the third (down 0.4% q/q) and second (down 0.6% q/q) quarters but was still down 1.0% y/y. Meanwhile, mining and quarrying output fell back 1.4% q/q in the fourth quarter after marked growth in the third (up 2.6% q/q) and, especially, second (up 7.6% q/q) quarters. It was still up 10.0% y/y in the fourth quarter. Mining and quarrying output was helped in the third and second quarters by fewer maintenance shutdowns in the North Sea in 2015 and also probably by tax breaks in the March budget. Also limiting industrial production in the fourth quarter, utilities output dipped 0.2% q/q, although it was up 2.0% y/y.
Additionally, construction output contracted 0.1% q/q in the fourth quarter and was up just 0.3% y/y. Construction output had previously contracted 1.9% q/q in the third quarter following expansion of 0.3% q/q in the second quarter and 2.1% q/q in the first. It should be borne in mind that there are still significant doubts about the accuracy of the construction data, and survey evidence pointed to expanding activity in the fourth quarter even if it has come well down from its peak levels.
Negative net trade likely to have weighed down again on Q4 GDP growth
Although the preliminary estimate of GDP growth in the fourth quarter of 2015 was based solely on the output side of the economy, it is worth noting that consumer spending probably made a robust contribution to growth but net trade was most likely negative again. Data out already show that retail sales volumes expanded 1.1% q/q in the fourth quarter (despite a 1.0% month-on-month drop in December). Furthermore, consumer spending on services appears to have been healthy in the fourth quarter (as was indicated by the reported strong growth in output in the distribution, hotels, and catering sector). Although earnings growth relapsed in the fourth quarter from peak levels around July/August 2015, consumers continued to benefit from negligible inflation as well as high and rising employment.
However, trade data for November/October 2015 were disappointing overall as exports were lacklustre in the face of sterling's strength and muted global growth. It may also be that there was some slowdown in business investment in the fourth quarter amid increasing uncertainties over the outlook. In the third quarter of 2015, net trade had been a major drag on GDP, knocking 1.0 percentage point off growth. This was largely payback for the second quarter when net trade had added 1.6 percentage points to growth. Imports grew 2.7% q/q in the third quarter, while exports fell back 0.3% q/q. In contrast, domestic demand was robust in the third quarter, with strong contributions from consumer spending (up 0.9% q/q), total investment (up 0.7% q/q, with business investment up 2.2% q/q), and government spending (up 0.6% q/q). Growth in the third quarter also benefited from a substantial positive contribution from inventories and statistical adjustment factors, which had been a major drag in the second quarter.
Outlook and implications
With the United Kingdom clearly finding growth harder to come by at the moment and facing significant domestic and global uncertainties, IHS is likely to trim its GDP growth projection for 2016 to 2.1% (from 2.2%) in its forthcoming February forecast. There are positives for the UK economy that should ensure that growth is still reasonable. In particular, ongoing low oil and commodity prices should keep UK inflation (0.2% in December) low, thereby supporting consumers' purchasing power alongside record-high employment. Admittedly, earnings growth has relapsed recently from the highs seen around July/August 2015, but we expect it to make renewed gains as 2016 progresses and the labour market tightens further.
Muted oil and commodity prices will also help companies' margins, which should be supportive for business investment alongside generally healthy company cash positions and relatively favourable credit conditions overall. A growing number of businesses (especially in the services sector) are likely to need to invest to expand capacity given now extended growth, while recent higher earnings growth and the introduction of the National Living Wage could increasingly encourage companies to invest in plant and equipment and in production processes to try to save labour. The January CBI quarterly industrial trends survey also reported that manufacturers were increasingly looking to invest in product innovation.
Furthermore, the recent weakening of sterling from an overall elevated level should help UK exporters, while we still expect there to be a modest pick-up in Eurozone and global growth in 2016 compared with 2015. Meanwhile, monetary policy is likely to remain very accommodative throughout 2016, with the Bank of England currently looking unlikely to raise interest rates until at least the fourth quarter of this year. Indeed, there is a very real possibility that the Bank could well sit tight until 2017.
However, fiscal policy will be tighter this year. Furthermore, we suspect that growth (particularly business investment) may be dampened modestly for a while in 2016 by uncertainty ahead of the referendum on UK membership of the European Union (which is due by end-2017 but we suspect will occur some time between June and the end of 2016). IHS assumes that the United Kingdom will vote to stay in the European Union and that reduced uncertainty after the referendum will help GDP growth to improve to 2.5% in 2017. A vote to stay in the EU should result in a significant pick-up in business investment as companies undertake investment that was delayed ahead of the referendum and react to a more stable environment. Meanwhile, consumer spending growth should be solid as purchasing power remains decent and employment high. Additionally, stronger global growth should be supportive for UK exports in 2017.