With US Q1 GDP set to be a huge disappointment to initial estimates of 3% growth set at the beginning of the year, and since plunging to 1% or lower when it is reported later this week because, well, it inexplicably snowed in the winter for the second year in a row, earlier today we learned that US harsh weather cross the Atlantic and landed in the UK where ONS reported that the economy grew at a tepid pace of just 0.3% in the first quarter, well below consensus estimates of 0.5%, and at the lowest pace since Q4 2012 when GDP posted a 0.3% drop.
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A key reason for the slowdown: the plunge in oil prices, which lead to a drop in North Sea production, which in turn dragged down the UK's industrial sector.
The economic slowdown comes at a sensitive time for the UK, less than two weeks ahead of the national election. The WSJ's take [8]:
The economy is a key battleground in the U.K. general election, which takes place on May 7. Polls signal a close fight between the Conservative Party—currently in a coalition government with the Liberal Democrats—and the main opposition Labour Party.
Prime Minister David Cameron and his Treasury chief George Osborne are trying to use the economic recovery as a way to win over voters after Britain finished 2014 as the fastest-growing nation among Group of Seven industrialized countries.
The U.K. economy is about 4% above its pre-downturn peak in 2008 and has expanded 8.4% since the Conservative-led government took charge in 2010.
However, Tuesday’s data points to Britain’s recovery losing steam across all sectors. Despite signs that consumer spending remains healthy, the services sector failed to garner enough strength to offset a disappointing start to 2015 for both manufacturing and construction. According to the ONS, activity in business services and finance slackened after climbing up to a three year-high last quarter, while a dip in North Sea production dragged down the industrial sector.
The weakness was quite widespread with only services output increasing by 0.5%qoq (contributing 0.4pp to the headline figure), while the other three sectors declined on the quarter. Production came in a touch below zero (-0.1%qoq, contributing 0.0pp), although output in manufacturing edged up (+0.1%qoq). Output growth in business sectors came in weaker at +0.1%qoq, below consensus expectations of ~ 0.5%qoq, while construction output was also very weak at -1.6%qoq.
Goldman has more:
According to the ONS's preliminary estimate, UK GDP rose by +0.3%qoq (1.2%qoq annl.) in Q1, weaker than expected (GS: +0.4%qoq, Cons: +0.5%qoq). Recorded growth in the quarter was dragged down by sharp falls in construction output (-1.6%qoq) and mining, oil and gas (-2.1%qoq), and weak growth in business services (+0.1%qoq). Today's GDP estimate contrasts with the strength of UK business surveys and labour market data. Our Current Activity Indicator (CAI) was consistent with +0.7-0.8%qoq growth in the quarter and, in time, we expect the ONS’s GDP estimate to be revised higher.
The ONS’s sectoral data suggest that GDP rose by +0.3%qoq in Q1. This was slightly weaker than our Tracking Estimate of the ONS's monthly output data (+0.36%qoq) and significantly weaker than the Consensus estimate (+0.5%qoq).
In a separate release, service sector output rose by +0.3%mom in February (+0.7% on a 3m/3m basis). As part of the preliminary GDP estimate, the ONS estimates output data for March using early survey responses. The ONS estimates that industrial production for March was flat on the month, while service sector output rose by 0.3%mom, unchanged from February. It also estimates that construction output increased by 5.3%mom in March, after the -0.9%mom fall in February. This suggests a strong starting point for output growth in Q2.
The ONS’s early GDP estimates are subject to significant revision, with the biggest revisions typically taking place around 2 years after the initial release (when the various measures of GDP are reconciled with each other and with other sources of information, such as tax returns). In past research, we have found that there is a statistically-significant downward bias in the ONS’s early reporting of GDP data and that business surveys and labour market data provide a more accurate guide to ‘post-revision’ GDP data than the ONS’s own early estimates (see here). Our Current Activity Indicator – which distils the information provided by these other indicators – was consistent with GDP growth of +0.7-0.8%qoq growth in Q1, suggesting that Q1 GDP will be revised significantly higher over time (Chart 1).
Goldman's conclusion based on the weak data from a BOE perspective is that "the implications of today’s data for monetary policy are limited, as the Bank of England also places relatively little weight on the ONS’s early output estimates. In the minutes of its March meeting, reflecting on the weakness of official output data, the MPC said that “sectoral output data were volatile and susceptible to revision ... and the output surveys had generally been more upbeat. Both the BCC and CBI surveys had suggested that growth in Q1 had remained solid and the composite Markit/CIPS output and expectations series had both risen sharply in March”.
Of course, who cares about hard data when manipulated and record stock-market biased surveys say the recovery is stronger. Well, the BOE will eventually, when it too is forced to join its peers from the ECB and BOJ (and soon PBOC and Fed) in some more coordinated global easing, because in a world in which trade and commerce has ground to a virtual halt, currency debasement is all that's left.
