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Friday 20 September 2019

Services and construction industry to hold back third-quarter economic growth

Economists expect gross domestic product (GDP) to expand by 0.3% between July and September.

Affodable new homes (PA)
Affodable new homes (PA)

By Ben Woods, Press Association Chief City Correspondent

The UK economy’s stuttering performance is expected to persist into the third quarter as lacklustre displays from the services sector and construction industry hamper economic growth.

Economists expect gross domestic product (GDP) to expand by 0.3% between July and September – in line with the previous two quarters – when official figures are announced on Wednesday.

While industrial production could pick up pace thanks to Britain’s buoyant manufacturing industry, the construction sector is expected to shift into reverse.

Growth from the UK’s powerhouse services sector, which accounts for around 79% of the economy, is also set to be sluggish.

The economy has struggled to bounce back to levels seen in the fourth quarter of last year when GDP rose by 0.7%, while Chancellor Philip Hammond admitted to MPs last week that Brexit had left the UK economy under a “cloud of uncertainty”.

Howard Archer, EY ITEM Club’s chief economic adviser, said growth will struggle to gather momentum during the final quarter of this year and into 2018.

Focusing on the third quarter, he said: “There is a strong chance that GDP growth was again limited to 0.3% q/q, although a slight uptick to 0.4% q/q is possible.

“This follows 0.3% q/q expansion in both the first and second quarters, which was the weakest six-month performance since the first half of 2012 and only half the 0.6% q/q expansion achieved in Q4 of 2016.

He added: “The overall boost to the economy from improved industrial production is limited by the fact that it only accounts for 14% of total UK output.

Another quarter of static growth would focus minds at the Bank of England as the Monetary Policy Committee (MPC) mulls whether to raise interest rates from record lows of 0.25%.

The Bank is facing pressure to take action next month after inflation surged to its highest level for more than five years at 3% in September, upping the financial pressure on households grappling with low wage growth.

While an interest rate hike would reduce inflation, there are warnings that the UK economy is not yet strong enough to handle a rise.

The International Monetary Fund, which cut its forecast for UK GDP this summer, recently raised the growth outlook for every advanced economy aside from Britain because of the uncertainty surrounding Brexit.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has suggested a second referendum that reverses Brexit would have a “positive” and “significant” impact on the UK economy.

The Paris-based think tank is currently projecting economic growth of just 1% in 2018, saying the uncertainty of Brexit negotiations is likely to leave the UK without an EU free-trade agreement when it exits in 2019.

However, Alan Clarke, Scotiabank’s head of European fixed income strategy, said 0.3% growth in the third quarter could be “good enough” for the Bank to press ahead with a November rate hike.

He said: “‘Good enough’ is hardly a resounding endorsement – rather like damning with faint praise.

“However, the point here is that several other boxes have been ticked to justify a rate hike, so we just need GDP growth to not obstruct this move.”

He said the boxes which have been ticked so far include: an unemployment rate of 4.3%, higher-than-expected inflation, signs of private sector wage inflation and stronger global economic growth.

The Bank’s MPC voted 7-2 to keep interest rates on hold in September, but minutes from the meeting showed that all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.

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