UK GDP Data in Focus: Analysts are Giving their Views

-GDP growth falls to 0.1% during first quarter, below 0.3% consensus.

-Weaker than expected figure may have killed off May interest rate rise.

-Pound Sterling under pressure against all developed world rivals.

© IRStone, Adobe Stock

Pound Sterling slumped during the morning session Friday as traders responded to the release of the latest UK GDP data, which showed UK economic growth slowing at a much faster pace than was expected during the first-quarter of 2018.

UK GDP growth came in at just 0.1% during the three months to the end of March, which was below the consensus for growth of 0.3% and far beneath the downwardly revised 0.4% growth seen in the final quarter of 2017. 

The data may just have put the final nail in the coffin of those who had been hoping to see the Bank of England raise interest rates again in May, as both GDP and inflation have recently fallen beneath the BoE's forecasts.

Bank of England officials had projected growth of 0.3% during the first quarter and inflation of around 2.8% but recent figures have shown the economy barely grew during the period and inflation actuall fell all the way back to 2.5%. 

Previously, as of 08:00 am Friday morning, pricing in interest rate derivatives markets implied a May 10 bank rate of 0.59%. This suggests markets assigned some probability of an interest rate rise to 0.75% next month but only time will tell whether those hopes will survive the morning's data. 

At the time of writing the Pound-to-Dollar rate is quoted 0.72% lower at 1.3814 while the Pound-to-Euro rate is 0.43% lower at 1.1544. Pound Sterling is also lower against all other developed world currencies barring the Swedish Krone.

Analyst Views: 

Paul Hollingsworth, senior UK economist, Capital Economics

"The downside surprise in Q1’s GDP figures is probably the final nail in the coffin for the chance of an interest rate hike in May. The 0.1% quarterly rise was below the consensus estimate and the MPC’s forecast of 0.3%. While industrial production growth actually accelerated, from 0.4% to 0.7%, construction fell outright by a whopping 3.3%, and services sector growth slowed a touch, from 0.4% to 0.3%."

"We now no longer think that the MPC will hike interest rates in May. Instead, we expect the MPC to raise rates again in August. But if we are right in thinking that a recovery in real earnings will help consumer spending, and overall GDP growth, to regain some pace over the coming quarters, then the bigger picture is still that rates are likely to rise faster than markets expect."

Samuel Tombs, chief UK economist, Pantheon Macroeconomics

"The chance of a May rate hike is now close to zero following the slowdown in GDP growth in Q1 to the lowest rate since Q4 2012 and to below the MPC’s 0.3% forecast. The week-long period of heavy snow in late February and early March certainly contributed to the sharp 3.3% quarter-on-quarter fall in construction output and the slowdown in growth in services output to 0.3%, from 0.4% in Q4. But note that construction output fell by a huge 3.1% month-to-month in January—before the snow hit—while the trend in retail sales and manufacturing output had already started to weaken at the start of the quarter."

"Looking ahead, GDP growth likely will recover back to the 0.3%-0.4% rates seen last year; households’ real incomes are now recovering and, at the margin, the recently-agreed Brexit transition deal should make some firms more confident to invest. But 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. As a result, we stand by our long-held call that the MPC will raise Bank Rate by 25bp just once this year and will wait until August to hike."

Viraj Patel, FX strategist, ING Group

UK GDP at 0.1% sees odds of a May #BoE hike slashed further. But you have to chuck in the caveats of soft weather & potential upward revisions (ONS say it was hard to estimate precisely how much the weather cost the economy). BoE will be brave to hike, but can't be ruled out $GBP pic.twitter.com/qyVcDC5qDU

— Viraj Patel (@VPatelFX) April 27, 2018

Neil Jones, head of corporates and FIG, Mizuho Bank

"A May rate hike is now likely off the agenda for the BoE, GBP is selling off hard. A 0.1% GDP reading that goes beyond the beast from the east suggests the slowdown is more structural. The statistics office suggests the weather impact was limited."

Jacob Deppe, head of trading, Infinox

“An interest rate hike in May now looks very much like a dead duck."

“In fact, given Bank of England Governor, Mark Carney, warned over weak retail sales and softer levels of business investment just last week, until, or unless, the economic picture improves it seems unlikely that interest rates will go anywhere."

“Wth wages rising by 2.8% in February and Consumer Price Inflation (CPI) falling to 2.5% in March, the MPC is under little pressure to hike rates until it has more data, particularly if inflation looks to be heading towards its 2% target."

“If there is an interest rate hike at all this year it now seems unlikely it will come before October.”

Analyst Previews:

Chris Turner, head of FX strategy, ING Group

"GBP has resisted the broadly stronger dollar relatively well, but today faces a local challenge in the form of 1Q18 GDP. Consensus looks for 0.3% QoQ, but there are clearly risks to the downside from the cold weather and widespread reports of difficulty in the retail sector."

"Even though a 0.2% QoQ outcome wouldn’t necessarily bury the chance of a May rate hike from the BoE, GBP would probably still suffer today. We see Cable support in the 1.3865/80 area, but a downside surprise on the UK GDPfigure, combined with the broadly stronger dollar risks a temporary set-back to the 1.3780 area."

Rhys Herbert, strategist, Lloyds Bank

"We expect today’s first estimate of Q1 UK GDP to show a slowdown in growth to 0.3% from 0.4% in the last quarter of 2017. If that does occur, the key issue will be how much of that admittedly mild deceleration was due to the March “cold snap” rather than a more fundamental slowdown."

"The evidence so far is mixed, with some survey data suggesting that the ‘Beast from the East’ had a big negative impact on activity in March. Aside from that, construction output is estimated to have fallen sharply in both January and February. However, industrial production rose in both months, as did services output in January. Together these two sectors make up more than 90% of the UK economy. We suspect that most of the early 2018 slowdown is temporary and expect a rebound in the current quarter."

Jacqui Douglas, chief European macro strategist, TD Securities

"Given Governor Carney's dovish comments last week (see: The BoE Injects Some Uncertainty as Brexit Negotiations Flare Up), uncertainty over the BoE's May rate decision has jumped (we still expect a May hike). Data will be a key driver of UK markets in the next few weeks."

"As we discuss in our preview, a very weak Q1 number (<0.2%) would suggest more at play than snow and could yield a pause in May in favour of an August hike, perhaps from spillovers on weaker euro area data."

Marshall Gittler, chief strategist, ACLS Global

"The qoq rate of growth is expected to slow modestly, owing in part to bad weather, which particularly dampened construction. But given the astonishing change in the weather – 19 April was the hottest April day in Britain for nearly 70 years – it’s likely that activity will bounce back in Q2."

"I think a result in line with the market consensus forecast would not be seen as particularly worrisome and could even boost expectations of a May rate hike, currently standing at 59%. GBP-positive."

Guy Stear, head of fixed income research, Societe Generale

"Friday is all about the GDP numbers which are the key data ahead of the May MPC meeting. It had been assumed that these weather-affected growth numbers would not be that important to the MPC but Governor Carney has implied that they will be."

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