LONDON: The British economy grew slightly faster than expected during the third quarter, as expansion in manufacturing and services offset a contraction in construction. Better-than expected growth of 0.4 per cent, compared with the consensus forecast of 0.3 per cent, removes one of the last potential barriers for the Bank of England’s Monetary Policy Committee to raise interest rates for the first time in a decade at its November meeting. “For weeks, the Bank of England has been semaphoring that interest rates are heading up,” said Ian Stewart, chief economist at Deloitte. “Today’s growth figures show that, despite the Brexit headwinds, UK growth is good enough to give the Bank the green light for a rate rise next Thursday.” UK government bonds fell sharply on the news. The yield on the two-year gilt — the most-sensitive to interest rate expectations — rose five basis points to 0.51 per cent, its highest level since the Brexit vote in June last year. The pound also jumped, climbing almost 1 per cent against the dollar, to $1.3247. The UK’s dominant services sector, which accounts for 80 per cent of the economy, contributed about three-quarters of the growth in the quarter, according to the preliminary estimate of gross domestic product published by the Office for National Statistics on Thursday. Business and financial services provided about half of overall growth, with a quarter coming from the distribution, hotels and restaurants category, which includes retailers. The remaining growth came from manufacturing.
Growth in computer programming was particularly strong, but the transport, storage and communications categories made no contribution to growth. The motion picture industry contracted after a strong performance in the second quarter. “Growth in the third quarter of 2017 continued at a similar rate as seen in the first half of the year,” said Darren Morgan, head of national accounts at the ONS. “Services, led by increases in IT, motor trades and retail, continued to drive GDP growth,” he added. “Manufacturing also boosted the economy with an improved performance after a weak second quarter.” Growth in the manufacturing industry during the third quarter partly reconciles the official figures with survey data, such as the purchasing managers’ indices, which have pointed towards an expansion in the sector. “The manufacturing sector appears to be reflecting the strength of the surveys at long last, posting a strong 1 per cent quarterly rise,” said Ruth Gregory, UK economist at Capital Economics. “Meanwhile, growth in the consumer-facing sectors is holding up well despite the ongoing real pay squeeze,” she said. Separate data published on Wednesday by UK Finance, a new trade group incorporating the British Bankers’ Association and the UK Cards Association, found that deposits at the UK’s largest high street banks grew in September at their slowest annual rate since the financial crisis. Borrowing on credit cards also increased during the month.
The UK construction industry, however, contracted for the second consecutive quarter. “This puts the sector in technical recession,” said Kallum Pickering, senior UK economist at Berenberg. But he pointed out that construction was extremely volatile and could bounce back in the near future. The preliminary estimate of economic growth contains only about 40 per cent of the information necessary to produce a full estimate of GDP, and is often revised. However, the ONS says its revisions are typically small and are no more likely to increase the estimate than decrease it.
