Muted GDP growth makes rate rises unlikely in 2016

UK-Currency-Money-Coins-700.jpg“Lacklustre” UK GDP growth in the fourth quarter of 2015 means we are unlikely to see interest rate rises anytime soon, economists say.

GDP growth in Q4 2015 was 0.5 per cent, up just 0.1 per cent on the previous quarter, estimates by the Office for National Statistics show.

Although the growth in Q4 was 1.9 per cent higher than in Q4 2014, this was the weakest year-on-year growth since Q1 2013.

The services and agriculture industries were the main drivers of GDP growth in Q4, up 0.7 per cent and 0.6 per cent respectively.

Meanwhile GDP for the whole of 2015 was up 2.2 per cent, a marked slowdown on 2014 when it was 2.9 per cent.

While the estimates are in line with expectations they are below the trend rate, meaning it is unlikely interest rates will be raised in the near-term, Vicky Redwood, chief UK economist at Capital Economics says.

“The economy faces a number of headwinds this year, potentially including the EU referendum and rising inflation and interest rates. So we doubt that we will see a strong pick-up in growth this year.

“Nonetheless, we don’t expect a further slowdown either. And we are still more optimistic than most about the prospects for growth next year.”

Howard Archer, chief UK and European economist at IHS Global Insight, says GDP growth will be down to 2.1 per cent this year.

“Not only was GDP growth in the fourth quarter relatively lacklustre, but it was worryingly lopsided – being completely dependent on the services sector,” he says.

“With the UK clearly finding growth pretty hard to come by at the moment amid significant domestic and global uncertainties, we expect GDP growth to be limited to 2.1 per cent in 2016.

“Indeed, the lacklustre and lopsided fourth quarter GDP data will do little to dilute expectations that the Bank of England could very well hold off from raising interest rates in 2016.”

Russ Mould, investment director at AJ Bell, says a slowdown in the growth rate for the fifth consecutive quarter will fuel concerns over a global economic slowdown.

“At first glance a 0.5 per cent quarter-on-quarter growth figure for UK GDP in Q4 2015 looks pleasing enough, however, the year-on-year picture is much more telling,” Mould says.

“The growth rate decelerated for the fifth quarter in a row. This loss of momentum is in keeping with the financial markets’ gathering fears of another global economic slowdown and also means it is highly unlikely Governor Carney will be pulling the trigger on an interest rate any time soon.”

However, Adrian Owens, investment director at GAM, is still positive on the fundamentals and says the market isn’t pricing in enough rate cuts.

“Recent indicators have pointed to a modest slowing in UK growth but the underlying drivers remain supportive,” Owens says. “While net trade and investment have been disappointing the consumer is in good shape.

“Real wages and salaries are growing close to 4 per cent and the labour market is exhibiting increasing signs of tightness. The unemployment rate is now close to the Bank of England’s estimate of the rate which is conducive with stable inflation. GDP is probably running close to trend but is expected to pick up further as the year progresses.

He adds: “Toward the year end the market is actually pricing in a small cut in UK interest rates. The first rate hike is not priced in until November 2017. I am of the view that the market is not pricing in enough of rate hikes in the UK. While the Bank of England probably won’t hike this year, once they start hiking next year I would expect more than one move.”