UK economy grows at fastest pace since 2007

27th January 2015

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The UK economy grew at its fastest rate since 2007 last year as annual GDP increased by 2.6%.

Office for National Statistics data showed that, while  GDP growth slowed slightly more than expected to 0.5% quarter-on-quarter, year -on-year growth improved to 2.7% in the fourth quarter from 2.6% in the third quarter.

Overall GDP growth of 2.6% in 2014 was the best performance since 2007 and up from 1.7% in 2013.

Howard Archer, chief UK and European economist at IHS Global Insight said this also meant that the UK may well have been the strongest expanding G7 economy in 2014, having been one of the best performers in 2013.

He said: “The main disappointment with growth in the fourth quarter was that it looks unbalanced on the output side of the economy at least. Services output held up very well with expansion of 0.8% quarter-on-quarter, but industrial production edged down 0.1% quarter-on-quarter while construction output contracted 1.8% quarter-on-quarter. Within industrial production, manufacturing output only edged up 0.1% quarter-on-quarter.”

Andy Scott, associate director of foreign exchange advisory services at HiFX, said: “This morning’s fourth quarter GDP growth figures from the UK were slightly below what was forecast but still show the economy growing at a fairly brisk pace in comparison to many other developed economies. The general sentiment of the population seems to be more upbeat compared to the same quarter in 2013 – though the weakness of the euro zone continues to pose the question of how long we can continue to grow with a stagnate euro zone economy.”

In terms of the implications for currency, Scott said that sterling’s reaction was marginally negative. “The average rate for GBP/EUR in Q4 2014 was 1.2670 – over 6% higher than in the same quarter of 2013 and its highest levels for two years. That no doubt weighed on businesses that compete in the euro zone where firms were reported as cutting prices almost continually during 2014 as a lack of growth and demand drove fierce competition.”

He added:  “The most obvious example would be manufacturing firms with activity growth cooling rapidly through the final part of 2014. Against the dollar, sterling averaged 1.5830 in Q4 which was actually around 2% lower than in 2013 – good news for the major corporates based here with big operations in the U.S. that generate large dollar revenues that are converted back into sterling.

“Our expectations for sterling this year won’t be good news for exporters into euro zone countries, as we are forecasting it to remain strong against the single currency, at levels above or close to 1.30 and could even reach 1.40 given the ECB’s recent decision to begin Q.E. The flipside however is of course that Q.E. could boost economic growth and therefore demand in the euro zone which would be good news for us all.”

Chris Williams, chief executive of Wealth Horizon, said: “Despite a slowdown to 0.5% in the final quarter, the overall growth for 2014 of 2.6% suggests the economy is heading in the right direction, especially as it represents the fastest annual growth since 2007.

“However, concerns remain that it is simply debt-fuelled consumer spending holding up the economy, and if you take into account the widely recognized troubles of the Eurozone it would be foolish to think that the UK will continue to be unaffected. We are not out of the woods yet.

“For investors however, there are still many opportunities to potentially make attractive returns, so it doesn’t pay to sit on the sidelines in cash.”

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