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UK economy expands at slowest pace since 2009

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It was a mixed week for economic data, dominated by the revelation that UK economic growth almost stopped in its tracks at the end of 2018. Trade, manufacturing and business investment all slumped, according to data from the Office for National Statistics (ONS), and meant that the economy grew by just 0.2% in the final quarter. That translates to growth for the year of just 1.4%, the worst annual performance since 2009. Only government and household spending prevented the economy contracting over the period, although between November and December, economic growth did fall into negative territory, at -0.4%. Economists said that the performance was due to Brexit uncertainties combined with concerns about global growth. Many believe that it may get worse from here. The Bank of England last week forecast a further slowdown at the start of 2019, and said there was a 25% chance of a recession later in the year. Household spending may be bolstered by news that the rate of inflation fell below the Bank of England’s 2% target for the first time in two years. The drop means more people will see increases in real wages, as more pay rises will exceed the rate of inflation. Recent data showed that pay growth had reached a 10-year high and the fall in inflation will add resilience to household finances. The ONS said consumer prices index (CPI), the preferred measure of inflation, dropped to 1.8% in January from 2.1% in December. Inflation was pulled down by falling electricity and gas costs after regulator Ofgem's energy price cap. However, Ofgem announced last week that the price cap will rise by 10% in April, which could mean inflation may rise back above the target within just a few months.

More evidence of a robust UK consumer came on Friday as the ONS reported a rebound in retail sales in January. Sales volumes rose by 1% after a disappointing December. The result was well ahead of expectations for a 0.2% increase. Sales were 4.2% higher than a year earlier, the best result since 2016.

There was more disappointing news on the housing front, however, chiming with a series of surveys that point to a slowing UK property market. The well-respected UK Residential Market Survey from the Royal Institution of Chartered Surveyors (RICS) showed that the market got off to a slow start in 2019, with enquiries, sales and new instructions all down due to continuing uncertainties around Brexit. The survey asks its members whether various market indicators such as prices, new instructions and agreed sales have improved, worsened or stayed the same. In response to the flow of new properties being listed in January, many more respondents answered that the number had declined, leading to a net balance of -25% on the RICS index. This is the worst reading for this measure since the EU referendum. New buyer enquiries also fell, for the sixth month in a row, with agreed sales slumping too. The average time taken to sell a property rose to 19.4 weeks, the longest since 2017 when RICS began measuring this metric. Looking ahead, respondents were downbeat on sales expectations for the coming three months in 11 out of the 12 regions covered. But the outlook for the next 12 months was better, with a net balance of +16% of respondents expecting sales to improve.

Click here to read this week's Market Roundup and Company Focus

Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

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