27th October 2015
The UK economy grew by just 0.5% in the third quarter of 2015, indicating that growth is slowing in the UK.
Experts say that a slowdown in the construction sector is largely to blame, while the services sector is helping to underpin growth.
Construction in the doldrums
Shaun Port, chief investment officer of Nutmeg, the investment platform, says: “The gloom appears to be lifting; business services are powering growth. The construction sector saw a large, but temporary, drag on GDP, while manufacturing was flat.
“Construction is very erratic and had a bad quarter – down 2.2%. Private sector housebuilding fell very sharply in July and August, but we think a rebound is likely. Manufacturing output was unchanged in Q3. Outside of buoyant car production and chemicals output, manufacturing is contracting due to falling overseas demand.
Service sector is driving growth
Port adds: ”Output was up 0.7% in Q3. After a weak start to the year, the sector is rebounding strongly. A shrinking of the financial services sector has been a drag on growth over the past five years, but this appears to have come to an end. Professional services are still powering the expansion, with media and technology also doing particularly well.
Implications for inflation and interest rates
“While UK inflation is effectively zero, underlying price pressures are building and the factors which have kept prices down are likely to prove temporary. The Bank will be looking ahead to next year when inflation will be rising,” Port says.
“The case is building for the first hike in base rate. While the weakness of Chinese growth has worried investors and policymakers over the summer, the gloom appears to be lifting. We expect the Bank to follow the US Federal Reserve in raising interest rates early next year. But the subsequent rate hike will not follow quickly after – the Bank is still likely to take its time.
“Consumer sentiment is improving as the jobs market is still very strong and wages are starting to creep up.”
What it means for investors
Ian Forrest, investment research analyst at The Share Centre, says: “The GDP figure came as a surprise to the market as it was worse than the 0.6% figure expected and a 0.2% fall on the previous quarter. Investors should note however, that it is just the first estimate.
“The UK economy looks like it has been losing momentum, hindered by China’s downturn, a construction slump and ailing manufacturers. However, recent figures including retail sales figures, have beat expectations. Therefore, despite the market’s disappointment this morning, investors should acknowledge that this level of growth is still relatively good and the weakness appears to be mainly in manufacturing which is not unexpected.”
What it means for savers
Calum Bennie, savings expert at Scottish Friendly, says: “People should heed Mark Carney’s advice to prepare for tighter monetary policy now and start to put away money for their future.
“Savvy savers have to think long-term to avoid potential fluctuations in the economy affecting their investment strategy. For those looking for potentially better returns, it may be worth considering stocks and shares ISAs especially given the very low rates of interest on cash accounts which are not likely to rise substantially even if Bank of England does increase base rate.”
What it means for sterling
Chris Towner, chief economist at HiFX, says: “Despite sterling remaining resilient after Q3 GDP missed expectations for 0.6% growth, there’s a certain Jekyll and Hyde lurking in the background.
“If you break down the figures, they show how disjointed the economy is, with some areas booming, and others collapsing. So far sterling volatility has been kept at bay; with investors not knowing whether to focus on the positives or the negatives, they have chosen to instead sit on their hands.”
Towner says that strong growth in the services sector is key.
He adds: “This is the heavyweight sector accounting for more than 75% of the economy and seems to be the component that is helping support sterling. However, he warns: “The horror part of the data comes from the construction sector, which staged its biggest fall since 2012. On top of this, industrial output slowed to just 0.3% growth in Q3, having grown 0.7% in the previous quarter. We are used to the boom and bust volatility of the construction sector; however industrial output dropping reflects a combination of weaker demand amid a stronger currency.
“Overall the UK economy is holding up well amid a slowing global economy; however the outlook looks a little more torrid than the calm waters we have experienced over the last couple of years. A move down to the 1.30 area in GBP/EUR may ease conditions and one can sense the exporters willing this on.”