The UK’s gross domestic product (GDP) in the fourth quarter was weaker than expected, up 0.1% quarter-on-quarter (consensus: 0.2% quarter-on-quarter).
This remains an economy that isn’t growing much. Purchasing Managers Index (PMI) business surveys are hinting at a pick-up in January though – helped by being past that period of Budget-related uncertainty.
Relevant Q4 growth was mostly driven in part by government and consumer spending (contributing about the same). There was a drag from inventories and fixed investment. Business investment disappointingly fell 2.7%Q. However, this can be a volatile component, and year-on-year business investment is up 2.0% in Q4.
For me, the picture painted by the data is (still) sluggish but not awful:
- Looking at Q4 month-by-month, weakness was concentrated in October when output fell 0.1% month-on-month (impacted by the JLR cyber-attack and likely by pre-Budget caution). November grew a downwardly revised 0.2% month-on-month and December GDP was 0.1% month-on-month as expected.
- Looking at December in more detail, there was a reassuring bounce in services output, up 0.3% month-on-month after 0.1% month-on-month. Although manufacturing and construction output both fell, the 0.5% month-on-month fall in manufacturing at least followed a 1.9% month-on-month rise in November.
- The rise in services in December was driven by a few components rather than just one, and only three of 14 sub-categories contributed negatively. The biggest positive contributors were administrative and support services, transportation and storage and wholesale/retail.
I continue to expect the Bank of England (BoE) to cut rates further this year (I have two cuts in my forecast for 2026). I doubt today’s data will have swung the balance of views on the committee. The 0.1% quarter-on-quarter GDP growth in Q4 was a tenth below BoE forecasts but in line with what it described as ‘underlying GDP’ (based on business surveys). We’ll get labour market and inflation data next week.
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