U.K. Economy Falls Short With Weakest Expansion in a Year

By Scott Hamilton  

Photographer: Jason Alden/Bloomberg

Pedestrians and shoppers pass stores in London. Britain’s economy was driven by... Read More

U.K. economic growth slowed more than economists forecast at the end of 2014 as production and construction shrank, countering strength in consumer demand.
The 0.5 percent quarterly expansion was the slowest in a year and compared with 0.7 percent in the previous three months. While it was also less than the 0.6 percent forecast by economists in a Bloomberg News survey, it still marked the eighth straight period of expansion and capped the economy’s best year since 2007.
Growth last year was driven by domestic demand, and today’s report showed the retail industry was among the strongest performers in the fourth quarter. A continued economic lift
from the drop in oil may help offset a drag from the U.K. general election now just 100 days away and weakness in the euro area, Britain’s biggest trading partner.
“We have a tug of war between the oil bonanza and the political uncertainty,” saidSimon Wells, an economist at HSBC Bank in London and a former Bank of England official. “Growth may surprise us in the first part of the year, but the whole of 2015 may look a lot like 2014.”
The pound traded at $1.5069 as of 10:29 a.m. London time, down 0.1 percent on the day.
Joe Grice, chief economist at the Office for National Statistics, said the cooling was mainly due to “erratic” sectors including construction and mining. “It’s too early to say if there’s a general slowing-down of the economy,” he said in a statement released with Tuesday’s data.

Election Push

The economy grew 2.6 percent in 2014, according to the ONS. The International Monetary Fund forecasts that it will expand 2.7 percent this year, which would be the fastest in the Group of Seven after the U.S.
Prime Minister David Cameron is counting on the recovery and rising employment to help him retain power after the May 7 election, with polls suggesting neither his Conservative Party nor the Labour opposition is on course for a parliamentary majority. The economy is now 7.8 percent bigger than it was in the second quarter of 2010, when the last general election took place.
“Today’s figures confirm that the recovery is on track,” Chancellor of the Exchequer George Osbornesaid in a statement. “But the international climate is getting worse.”

Retail Boost

The fourth-quarter data showed that services, the largest part of the economy, grew 0.8 percent and added 0.6 percentage point to gross domestic product. Retail was the biggest contributor to services. Production fell 0.1 percent and construction plunged 1.8 percent, with the latter knocking 0.1 percentage point off GDP.
Within production, energy supply contracted 2.8 percent, partly reflecting a mild winter. Today’s first estimate of GDP for the quarter is based on about 44 percent of the data that will ultimately become available.
With U.K. inflation at 0.5 percent, signs of a cooling in the economy may support the case for the Bank of England to keep the key interest rate at a record low for longer. The outlook prompted policy makers Martin Weale and Ian McCafferty, who’d been voting for rate increases since August, to end their push this month.
Oil prices dropped almost 50 percent last year while U.K. wage growth has picked up, suggesting a six-year squeeze on living standards may be ending. The economic outlook may be further improved by the European Central Bank’s 1.1 trillion-euro ($1.2 trillion) stimulus plan to revive growth and inflation in the euro region.
“We think that GDP growth could pick up to 3 percent this year,” Samuel Tombs, an economist at Capital Economics in London, said in a research note. “The best days of the U.K.’s recovery may still lie ahead.”