UK GDP growth trimmed as UK veers into G7 slow lane

UK gross domestic product growth for 2017 was revised down in Office for National Statistics' second estimate on Thursday, meaning last year was the economy's worst performance since 2012.

GDP growth rose just 0.4% in the fourth quarter compared to the third, the ONS said, revising down from its initial 0.5% estimate, which meant year-on-year growth was cut to 1.4% from 1.5%.

The ONS also revised down first-quarter growth for the previous year, which confirms the UK has gone from being fastest growing G7 economy in 2016 to slowest in 2017.

A downward revision to the estimated output of the production and services industries was the main reason for the 0.1 percentage point revision from the preliminary estimate, as the ONS revealed a disappointing mix of expenditure components. Business investment was flat, consumer spending growth slowed to 0.3% compared to the prior quarter and net trade subtracted 0.5 percentage points as exports fell 0.2% and imports rose 1.5%.

Growth in the fourth quarter was mainly driven by business services and finance within the services sector, though the statistical agency also made a small downward revision to services since the preliminary estimate of GDP, though noted this does not impact on services quarterly growth to one decimal place.

The ONS revealed the services industry saw flat growth in December, with the index of services unmoved on the month after a 0.4% rise the previous month, though the three-month measure showed 0.6% growth, which was better than the 0.5% expected and the previous reading of 0.4%.

The economy appears to have gathered a little momentum in the second half of last year, said economists at Pantheon Macroeconomics, with Q1 GDP growth was revised down by one-tenth to 0.2%, Q2 was restated at 0.3% and Q3 revised up one-tenth to 0.5%.

"The expenditure breakdown casts some doubt on the sustainability of the pick-up," Pantheon said. "Households appear to have funded Q4’s 0.3% quarter-on-quarter rise in real spending by saving less and/or borrowing more. Sharp rises in prices meant that spending rose by 1.1% in nominal terms, greatly exceeding the 0.5% increase in the compensation of employees."

He noted that the drag from trade reflected a surge in imports of non-monetary gold, which boosted the net acquisition of valuables component of GDP. "But together, these two components only had a neutral impact on GDP growth, suggesting that a trade boost from sterling’s depreciation still is not coming through."

Total investment was driven by a surge in government investment and solid growth in investment in dwellings, while business investment was flat, which Pantheon suggested could mean Brexit still is fostering caution in boardrooms.

"All told, then, the latest GDP data suggest that the economy remains in a fragile state and does not need to be cooled with another rate rise as soon as May."

Economist Chris Williamson at IHS Markit noted that the growth downgrade means that 2017's economic growth of 1.7% was the worst performance since 2012 and brings the GDP expansion into line with the signal from his company's recent PMI surveys.

This is particularly notable, he pointed out, "because the PMI surveys indicate that further growth momentum was lost in January, when business activity grew at the weakest rate for one and a half years".

The most recent PMI indicated that the quarterly pace of economic growth could be slowing to 0.3% in the first quarter.

Although mining, oil and quarrying sector was strong, other areas of the economy look "worryingly weak", Williamson said, with construction output down 0.7%, less than the 1.0% previously estimated but still weak, business investment flat, and household spending modest.

“The depreciation of sterling meanwhile showed few signs of benefitting the economy in terms of trade, with exports in fact acting as a drag on the economy in the fourth quarter. However, manufacturing continued to expand at a solid pace in the fourth quarter, as did business and financial services and transport and communications, helping drive the upturn in GDP. The worry is that, with the exception of financial services, survey data hint at these sectors also losing steam in January.”