UK economy cools - is a May rate rise off the table?

UK economy grew by 0.1% last quarter – is a May rate rise off the table?

The UK’s economy barely grew in the first quarter of 2018, according to the latest figures from the Office of National Statistics.

GDP growth was recorded as being just 0.1 per cent for the first three months of 2018, the lowest rate of growth since 2012, and well below Q4 2017’s growth rate of 0.4 per cent.

The GDP reading was also way below many forecasts, including the Bank of England’s own, of 0.3 per cent growth. Likewise, Lloyds' Business Confidence Barometer and the BCC's Quarterly Economics Survey suggested the UK economy would grow by of 0.4 per cent in the latest quarter.

The biggest drag on GDP growth was a contraction in construction, falling by 3.3 per cent. At the same time, while the more extreme than usual weather in March of this year likely had a negative effect, its overall impact on growth is estimated to be small. 

Such sluggish growth strengthens the case against a rate rise in May. As the chart below shows, the Bank of England has never raised interest rates at a time of such weak growth. 

According to Pantheon Macroeconomics, latest GDP data means that the ‘the chance of a May rate hike is now close to zero.’

While noting that GDP growth should recover back to 0.3-0.4 per cent later in the year, with household incomes in recovery and the Brexit transition deal hopefully increasing the confidence of firms to invest, they expect the Bank of England to hold off on raising rates yet. 

Adds Pantheon Macroeconomics: ‘With inflation falling much more rapidly back to its target than the MPC expected and wage growth still not building momentum, the MPC has the luxury of being able to delay raising interest rates in May to be sure that the Q1 slowdown was largely a weather-related blip.’

Pantheon Macroeconomics predicts that the Bank of England will raise rates just once this year, and most likely in August. 

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