17 MAY


Macro , Topics

United Kingdom: losing steam?

Despite a hike in the BoE's key rate practically being announced at the Monetary Policy meeting in February, recent statements by the Governor combined with the early April publication of lower-than-expected inflation, followed by sluggish growth in the first quarter, led the markets to push back the projected date of the next monetary tightening move (Charts 1 and 3).

According to the Office for National Statistics (ONS), the harshness of the past winter cannot, by itself, fully explain the drop in activity recorded in the construction sector in the first quarter (-3.3%). On the plus side, it did give a boost to industrial output (+0.7% over the quarter), fuelled by increased energy consumption and the re-opening of a pipeline in early January. Meanwhile manufacturing, which represents 72% of industrial output, only climbed 0.2% in Q1. Lastly, the services sector – the traditional driver of British growth, only picked up 0.3%. As underscored by the ONS, the growth rate in the services sector “shows a longer-term weakening”, particularly in the more domestic consumer-facing industries, the reason being that ever since the Brexit vote UK households have seen their purchasing power undercut by rising inflation (Chart 2) owing to the depreciation of the pound sterling.

Uncertainty surrounding the outcome of UK/EU negotiations also undoubtedly took its toll. The Irish border, for one, is still a big question mark. The EU does not want a “hard border” between the Republic of Ireland and Northern Ireland, and has called for Northern Ireland to stay in the customs union. Theresa May's administration and the DUP (the Democratic Unionist Party of Northern Ireland that allowed May to command a working majority in Parliament) see this proposal as an affront to the sovereign integrity of the UK, which plans to leave both the economic and customs union. EU negotiator Michel Barnier warned, however, that there will be no withdrawal agreement if the Irish issue is not resolved.

With no visibility on the outcome of negotiations, UK companies may end up postponing their investment plans, while household purchasing power remains under pressure (although the inflation peak is almost certainly already behind us). Against this backdrop, UK GDP growth is expected to slow to 1.4% in 2018 (vs. 1.8% in 2017) and may weaken further in 2019... barring a dramatic turnaround in the conduct of the negotiations with the EU, that is!