U.K. Economy Slows in the Third Quarter

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The FINANCIAL — The British economy grew at a weaker-than-expected pace during the third quarter, but the slowdown is unlikely to shift Bank of England officials’ view that interest rates in the U.K. will need to rise sooner than markets expect, according to Nasdaq.

Britain’s gross domestic product, a measure of all goods and services produced in the economy, rose 0.5% between July and September, government statisticians said on October 27, an annualized rate of 2%. This was slower than the second quarter’s 0.7% expansion and undershot expectations by most economists and policy makers, including the Bank of England, who were expecting growth to come in at a 0.6% quarterly rate.

Slower growth in Britain could be a sign that weaker global activity is already hampering the economies of western nations, as the U.K. is the first country among Group of Seven countries to release GDP numbers. Tepid Chinese data has spooked investors across the globe, who fear a slowdown in emerging markets could further clog trade channels and pose a threat to developed nations.

According to the U.K. Office for National Statistics’ preliminary figures, however, the British economy slowed due to a strong dip in construction output, as well as earlier-than-usual summer shutdowns in car factories and oil extraction firms in the North Sea.

This lifts hopes that growth will be increased in following estimates, as officials expect September’s industrial production data–which aren’t available for the preliminary take on GDP–will show a strong rebound from this summer’s lull. Construction figures, which have looked bleak for months, are also prone to upward revisions.

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Indeed, it appears unlikely these fresh figures will ruffle rate-setters at the Bank of England, who have so far shrugged off global fears and signaled borrowing costs could rise early next year. This would be much earlier than investors, driven by Chinese woes, currently expect. Market derivatives price in the BOE leaving rates pegged at their current record-low 0.5%–where they have stayed for more than six years–until late-2016 or even 2017.

In records from their October policy meeting, BOE officials said a slower expansion of U.K. activity in the third quarter was “a natural consequence of the economy approaching a balance” after recovering from the financial crisis.

Economists agree the U.K. economy is showing signs of underlying health, as official figures show pay for British employees rising at a brisk pace and unemployment falling to new precrisis lows, just as a much-awaited recovery in productivity gains seems to be right around the corner. Tuesday’s figures showed Britain’s powerhouse services sector– it makes up almost 80% of national output–continued to grow at a briskly pace.

Nevertheless, there is increasing evidence the strength of the pound has been a significant hurdle for British exporters, especially factories, as it makes their products more expensive abroad. In August, sterling hit its highest level in seven-and-a-half years compared with a basket of other major currencies, BOE figures show.

Many analysts also fear the U.K. Treasury’s promises to balance the books by slashing government spending could lead to a more pronounced slowdown in growth in the following months.

 

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