UK Q4 GDP: Strong investment growth provides support – Capital Economics

UK’s second estimate of Q4 GDP revealed that the economy grew by a downwardly revised 0.4% q/q in the final quarter of 2017, with annual growth revised down from 1.8% to 1.7%, notes Andrew Wishart, UK Economist at Capital Economics.

Key Quotes

“Encouragingly, however, investment growth has remained strong. And with inflation starting to ease off and global economic growth robust, we suspect both household spending and net trade will provide greater support ahead.”

“The downward revision from the first estimate was due to a small revision to production, which the ONS now thinks expanded by 0.5% on the quarter as opposed to 0.6%. That largely reflected a larger drag from the closure of the forties pipeline. Mining output is now thought to have contracted by -4.7% on the quarter as opposed to -3.9% in the first estimate.”

“Meanwhile, quarterly growth in construction output was revised up slightly, from -1.0% to -0.7%. But the sector remains in recession, having contracted for three consecutive quarters. Growth in the dominant services sector was unchanged at 0.6% q/q.”

“On the expenditure side investment and household expenditure were the main drivers of growth. A 1.1% quarterly rise in investment put annual growth for 2017 at 3.9%, the strongest since 2014. Household spending, meanwhile, increased by 0.3% q/q, down from 0.4% in Q3. Having fallen from 3.1% in 2016 to 1.8% in 2017, annual growth in household spending is likely to increase this year as the squeeze from inflation on real wages eases.”

“Meanwhile, net trade knocked 0.5pps off quarterly growth as imports rose while exports fell slightly. But note that the trade figures were distorted by a large net acquisition of valuables, such as non-monetary gold, from overseas. Excluding this effect, net trade knocked just 0.1pps off quarterly growth.”

“Looking ahead, most forecasters expect GDP growth to slow further this year (the consensus is 1.5%). However, with inflation set to drop back – easing the squeeze on households’ real incomes – investment intentions remaining strong, and exporters still benefitting from a weaker pound, we expect annual GDP growth to strengthen to 2.0%.”