‘Beast from the east’ lingers on for UK economy

‘Beast from the east’ lingers on for UK economy

The so-called ‘beast from the east’ seems to have caused more disruption than first thought. During the first three months of 2018, the UK economy grew at its slowest level for six years, and the weather – in particular the heavy snowfall during March – has been tagged as a major culprit.

UK GDP growth stalled to just 0.1 per cent in the first quarter, a notable decline from 0.4 per cent at the end of 2017 and the lowest recorded growth figure since 2012 (see Chart 1). This followed on from the economy’s 1.2 per cent growth in the previous year, the worst recorded level for half a decade.

Snow and growth were not the only things to fall in March. The FTSE 100 closed the quarter 10 per cent lower than levels seen at the start of the year. The UK’s main market has since recovered these losses to hit a record high in mid-May, but the volatility is perhaps illustrative of the uncertainty that has affected the wider economy.

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Hike reversal

In light of the deteriorating data, the Bank of England (BoE) decided against a rate hike in May, a further rise having seemed odds-on just weeks earlier. The Monetary Policy Committee voted seven to two for the base rate to remain at 0.5 per cent, and suggested that weather conditions largely caused the first-quarter slump. But the BoE remains confident this signified a blip rather than a trend, with governor Mark Carney highlighting a disconnection between the underlying and headline data.

Other analysts also believe the slowdown will be short-lived. Karen Ward, chief market strategist for the UK and Europe at JPMorgan Asset Management, says: “We expect the recent weakness in the data to largely prove temporary.

“If potential [annual] growth really is just 1.5 per cent and the economy is already at full employment – as the BoE believes – then a pick-up in growth next year should precipitate a faster pace of normalisation.”

It is thought, however, the UK’s forecast GDP for 2018 will now be forced to come under revision. GDP is expected to rise to 0.4 per cent in the second quarter, but would need to grow substantially higher in order to match the Office for Budget Responsibility’s (OBR) annual forecast of 1.5 per cent. 

A rate rise is unlikely to aid the economy in this quest. Nevertheless, Ms Ward anticipates action before the year is out. “We expect the BoE to raise rates by 0.25 per cent in November, and if the global backdrop is similarly robust going in to 2019 then, much like the US Federal Reserve, the BoE could settle in to a more significant pace of normalisation next year,” she says.

Steve Davies, manager of Jupiter’s UK Growth fund, thinks the BoE could act even sooner. He says: “A rate rise in August is a perfectly feasible possibility. I thought [Mr Carney] was signalling that quite clearly. [But some] people don’t believe that Q1’s a blip.

“The BoE’s reason for looking to raise rates is that it doesn’t think there’s much slack in the economy, and therefore wages and domestic inflation are starting to perk up. The more it sees wage growth heading towards 3 per cent and the more it sees jobs continuing to be created, the more inclined it will be to find reasons to put rates up.”