UK GDP forecast to slow to 0.4% on ‘disappointing package of data’

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The UK economy is set to slow to 0.4 per cent in Q1 off the back of a disappointing package of data, according to IHS Markit.

Industrial production and construction output fell back appreciably in February while the trade deficit widened.

The data is some of the last to be released before Q1 GDP is revealed on 28 April.

IHS Markit chief economist for UK and Europe Howard Archer says his forecast was wavering between 0.4 per cent and 0.5 per cent, but the latest data has caused him to “plump for 0.4 per cent”.

Archer attributes much of the slowdown to consumers becoming more cautious, with evidence that big ticket purchases were brought forward at the end of 2016 in anticipation of rising prices.

In February, industrial production fell back 0.7 per cent month-on-month after a drop of 0.3 per cent in January, construction output fell back 1.7 per cent and the trade deficit widened to £3.7bn.

Archer says construction companies will be hoping that recent Government measures aimed at boosting infrastructure and housebuilding have a material beneficial impact, but that input costs are being pushed markedly higher by a weak pound, with a substantial amount of components and materials imported.

There is also evidence that some clients are reluctant to commit to major projects in an uncertain environment, Archer adds.

Export performance will be an important metric to keep an eye on in the coming months to determine whether it can partially compensate for a likely softening in domestic demand, Archer says due to softer consumer spending and limited business investment.

The latest manufacturing surveys on foreigner orders are encouraging, Archer says, with the export orders balance in the CBI industrial trends survey jumping to a 39-month high of +10 per cent in March, led by the pharmaceutical and mechanical engineering sectors.

David Page, senior economist at AXA Investment Managers says the data will probably soothe hawkish concerns in the Bank of England monetary policy committee and says financial markets posted a modest response.

Government bond yields fell a little, 2-year yields down 1bps since the data and 10-year yields down 2bps to 1.08 per cent, Page notes. Sterling saw more reaction, slipping by just over 0.3 per cent to the euro and US dollar.

Page adds: “Further evidence of slower activity is likely to increasingly undermine the prospect of tighter monetary policy in the UK.

“Our own outlook is for Bank Rate to remain unchanged until 2019. This is likely to contribute to further sterling weakening over the coming months.”