The UK economy cooled in the third quarter of the year as a slump in construction output proved a drag. GDP expanded by an estimated 0.5% between the second and third quarters, preliminary figures showed today. This was below consensus forecasts of 0.6% growth and compares with a robust 0.7% growth in the previous quarter. The year-on-year rate also slowed, coming in at 2.3% from 2.4% in the previous quarter.
The services sector, which accounts for just under 79% of UK GDP, expanded by 0.7%, slightly faster than in the previous quarter. Growth in the sector was driven by business services and finance. The production sector also showed positive growth as mining and quarrying output jumped by 7.5%. But manufacturing contracted for a third straight quarter by 0.3%. Agriculture output was 0.5% higher, while the volatile construction sector shrank by 2.2%, deducting 0.14% from the headline quarter-on-quarter rate.
The preliminary estimates of GDP are based on about 44% of the data that is collected in total so it may yet get revised higher to 0.6%. But even at 0.5%, the UK economy is performing more strongly than its European counterparts, which have seen lagging growth rates since the 2011 euro debt crisis.
The soft growth data is not expected to alter the Bank of England’s outlook on the UK economy as it’s too early to judge whether the Q3 slowdown is part of a more prolonged downturn. With fears that slower growth in emerging markets and a stronger pound is damaging the prospects of UK manufacturers, the Bank of England may take a more cautious stance in deciding when to raise interest rates. However, strong growth in the services sector and continued tightening of the UK labor market are likely to weigh more heavily with policymakers. The Bank of England’s thinking should become clearer at its next monetary policy meeting on November 5 when it will publish its latest quarterly inflation report.
The pound reacted negatively to the weaker-than-expected data, dropping to 1.5306 dollars immediately after the release from around 1.5345 dollars prior to the data. But it recovered quickly to climb back up to 1.5352 dollars before easing slightly to around 1.5338 dollars in mid-European trading. The euro, which had been falling against the pound before the data, jumped to 0.7211 but later fell back slightly to 0.7207.