UK economy remains a laggard even as growth beats forecasts

[LONDON] The UK economy ended 2017 on a stronger-than-expected note, but it's moving at a pedestrian pace given the global acceleration that's taking place.

The 0.5 per cent expansion in the fourth quarter announced on Friday was better than the 0.4 per cent forecast by economists in a Bloomberg survey. For the full year, growth slowed to 1.8 per cent, the weakest in five years, as consumers and companies felt the repercussions of the 2016 vote to the leave the European Union.

While the economy has performed better than some predicted before the Brexit vote, Britain failed to latch on to a global upswing and keep up with its Group of Seven peers last year as a global upswing gathered pace. Estimates suggest that it's lagging well behind Germany and the US, while Bank of England Governor Mark Carney noted Friday that the UK is an "outlier" and Brexit has cost the economy tens of billions of pounds in lost output.

In the fourth quarter, gross domestic product rose 1.5 per cent from a year earlier, the weakest pace since early 2013. Annualized growth in the fourth quarter was 2 per cent, compared with a forecast for 3 per cent in the U.S.

The better quarterly pace lifted the pound, which was 0.8 per cent higher at US$1.4251 as of 10:24 a.m. London time.

The outlook doesn't offer much in the way of optimism. Growth is expected to slow this year to 1.4 per cent, as living standards remain under pressure from the sterling-induced upsurge in inflation and companies delay investment until they see what Brexit means for trade. In a sign of how far Britain's star has fallen, International Monetary Fund forecasts this week saw upgrades for almost every major economy except the UK.

The annual growth is a "particular disappointment given the rapidly improving global economy," said Suren Thiru, head of economics at the British Chambers of Commerce.

Asked in a BBC radio interview Friday to quantify the damage from Brexit, Mr Carney said the economy is about 1 percentage point smaller than it would have been had the 2016 European Union referendum gone the other way, and that the gap will widen to about 2 percentage points by the end of the year. That's the equivalent of about £40 billion (S$74.1 billiion).

The BOE raised interest rates for the first time in a decade in November after assessing that supply constraints mean the economy can now grow by only 1.5 per cent a year without generating unwanted inflationary pressures. Another hike is forecast late in 2018, though some economists, including David Owen at Jefferies, see it coming as soon as May.

Policy makers will announce their next policy decision, as well as unveil new economic projections, on Feb 8.

What Our Economists Say:"The data flow this week has significantly increased the chances that the Bank of England delivers a hawkish message at its February meeting. Whether it can execute will depend heavily on the data continuing to suggest slack is being eroded. If it does, a rate hike this year will become a real possibility."

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