By Paul Hyland – Chartered Wealth Manager
- UK economic growth reaches seven-year high, despite slowing in Q4
- Services remain the key driver of growth as construction and industrial output weakens
- UK inflation drops to joint record low, reinforcing the case against an early interest rate rise
- Prospect of increased interest rates in US
- Weakness in commodities could prove challenging for emerging markets
UK Economic Review
The first official estimate of economic growth (GDP) revealed that the UK economy grew by 0.5% in Q4 2014, slower than the growth of 0.7% recorded in the previous quarter. UK economic output is now estimated to be 3.4% higher than the pre-economic downturn peak in Q1 2008.
Services remain the dominant sector of the UK economy growing by 0.8% in Q4 and accounting for almost all of the growth recorded in the quarter. The agricultural sector, which accounts for less than 1% of UK economic output, grew by 1.3% in Q4. Construction was a drag on growth falling by 1.8% in Q4, and industrial output fell by 0.1%.
Despite the slowdown in Q4, the UK economy grew by 2.6% in 2014 as a whole, the fastest rate of growth since 2007 and double the average growth of 1.3% over the past decade. Furthermore, based on current projections, the UK is now expected to have been the fastest growing country G7 economy in 2014.
UK unemployment fell to a six year low in November 2014 and has continued to fall, now standing at 5.8%. The labour market remains a source of strength for the UK economy.
CPI inflation fell from 1% in November to 0.5% in December 2014, which is the lowest on record (jointly with 2009). The main contributions to the slowdown came from the continued fall in motor fuel prices and the impact of the earlier gas and electricity price rises of December 2013 falling out of the calculation. Inflation is now likely to remain below 1% for the rest of the year.
Regular pay growth reached 1.8% in annual terms in the three months to November 2014, the fastest rate of growth since September 2012. Stronger wage growth coupled with the continued fall in inflation means that wages are rising in real terms.
Although the UK recorded the strongest growth for seven years in 2014, the risks to the economy remain: the main risk is the possibility that the slowdown in growth evident in recent months could worsen further, as the UK economy is still overly reliant on consumer spending rather than investment and trade. The general slowdown in the global economy, particularly in the Eurozone is also a major risk to the recovery.
Global Investment Outlook
The US economy is expected to move into mid-cycle, with growth modestly above trend but inflation contained. This raises the prospect of rate increases in the US while Europe and Japan remain reliant on stimulus. 2015 looks set to see a continuation of growth and policy divergence across developed economies. Meanwhile, the prospect of rising US interest rates, together with a persistent weakness in commodities, could well prove challenging for emerging markets.
The information in this email does not constitute advice or a recommendation and investment decisions should not be made on the basis of it.