Sunday 16 December 2018

UK economy unexpectedly grows, upping pressure on BoE to hike interest rates

Bank of England governor Mark Carney
Bank of England governor Mark Carney

Ben Woods

The UK economy unexpectedly accelerated in the third quarter, upping the pressure on the Bank of England to hike interest rates next month.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.4pc in its initial estimate for July to September this year.

The rise is above expectations of 0.3pc, as economists predicted growth in line with the first and second quarters of 2017.

The lion's share of the expansion came from the services and manufacturing industries, while the construction sector fell into recession.

However, the UK economy is still struggling to bounce back to levels seen in the final quarter of 2016 when GDP rose by 0.6pc.

It comes as the Bank's Monetary Policy Committee (MPC) mulls whether to raise interest rates from record lows of 0.25pc in November, as inflation continues to soar.

Howard Archer, EY ITEM Club's chief economic adviser, said: "Improved third-quarter GDP growth of 0.4pc quarter-on-quarter increases the chances that the Bank of England will raise interest rates from 0.25pc to 0.5pc on November 2 after the MPC meeting."

Higher than expected third-quarter growth is a boost for Chancellor Philip Hammond as he gears up to deliver his Budget next month.

He recently warned that Brexit had left the UK economy under a "cloud of uncertainty", while the International Monetary Fund also raised the growth outlook for every advanced economy aside from Britain because of its EU divorce.

Responding to the GDP announcement, the Chancellor said: "We have a successful and resilient economy which is supporting a record number of people in employment."

On an annual basis, GDP expanded by 1.5pc in the third quarter, compared to the same three months in 2016.

Sterling shot up following the release, rising more than 0.3pc against both the US dollar and the euro to 1.317 and 1.119, respectively.

Darren Morgan, the ONS head of national accounts, said: "Services, led by increases in IT, motor trades and retail, continued to drive GDP growth.

"Manufacturing also boosted the economy with an improved performance after a weak second quarter.

"However, construction output fell for the second consecutive quarter, although it remains above its pre-downturn peak."

Britain's powerhouse services sector, which accounts for around 79pc of the UK economy, grew by 0.4pc during the third quarter, the same rate as the three months before.

The main drivers came from the business services and finance sector, which climbed by 0.6pc during the period.

Industrial production also expanded by 1pc, boosted by a 1pc jump from manufacturing and a 1.5pc rise from mining and quarrying.

It helped offset a dismal performance from the construction sector, which fell by 0.7pc between July and September - the lowest drop since the third quarter of 2012.

It means the construction industry is now in recession after also declining by 0.5pc in the second quarter.

John Hawksworth, PwC's chief economist, said: "These numbers do not change the big picture for the UK, which is of an economy that has slowed due to higher inflation linked to the weak pound and Brexit-related uncertainty dragging on business investment.

"But we should not overdo the gloom as there is nothing in this or other recent data to suggest that the slowdown is in danger of turning into a recession."

A separate measure of the services sector - the index of services - showed output growth of 0.2pc  between July and August this year.

Labour's shadow chancellor John McDonnell said: "The UK is not growing as fast as many of our trading partners in the EU or the USA, and it is becoming increasingly clear that this Government has to use next month's Budget for a change of direction."

Press Association

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