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(Bloomberg) — The U.K. economy slowed more sharply than expected in February after storms hit construction work and supply chain delays held up output from carmakers.
The 0.1% expansion followed a robust 0.8% gain in January, Office for National Statistics figures showed on Monday. Growth of 0.2% was forecast by economists.
The figures indicate weakness even before the war in Ukraine further upset the flow of goods into Britain. Inflation, which is squeezing consumer living standards at the sharpest pace in living memory, may provide a further drag on the economy in the coming months.
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“The U.K. economy was losing steam even before the impact of Russia’s invasion of Ukraine,” said Suren Thiru, head of economics at the British Chambers of Commerce. “February’s slowdown is likely to be the start of a prolonged period of considerably weaker growth.”
The pound fell below $1.30 for a second day, dropping 0.2% to $1.2993.
The figures left overall economic output 1.5% above its level in February 2020, before the pandemic struck. Construction fell in the month, driven solely by a decrease in repair and maintenance work. New business increased slightly. Storms from Feb. 16 to Feb. 21 delayed some projects, and some builders said they’re having difficulty getting materials.
The rise in GDP, which reflected continued easing of coronavirus restrictions, leaves Britain on course for growth of around 1% in the first quarter. However, that may be a high-water mark, with soaring energy bills and inflation set to deliver an unprecedented hit to living standards this year.
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What Bloomberg Economics Says …
“From here, the cost-of-living crisis and war in Ukraine is likely to mean a slowdown in activity. But we doubt that will be enough to deter the Bank of England from hiking rates in May. Still, the weak growth outlook will probably mean the central bank pauses its hiking cycle in the second half.”
–Dan Hanson, Bloomberg Economics. Click for the REACT.
The pressure facing households was underlined by the latest Bloomberg monthly survey, published Monday. Economists now expect inflation to peak at 8.1% in the second quarter, up from a previous forecast of 7.6% and the fastest quarterly rate since 1991.
“Near-term challenges to the outlook have ramped up, with a growing cost-of-living crunch set to weigh on growth,” said Alpesh Paleja, lead economist at the CBI, Britain’s biggest business lobby group. “Businesses are also grappling with headwinds from the Ukraine conflict, which is exacerbating cost pressures and supply chain disruption.”
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The Bank of England is forecast to deliver two further rate hikes this year, taking benchmark borrowing costs to the highest since the financial crisis. Growth is expected to average 0.3% a quarter for the rest of the year.
Growth in February was led by service industries, which expanded 0.2%. Hospitality and tourism benefited from the easing of Covid restrictions. Vaccinations and testing fell during the month, weighing on the health care sector. Also dragging on services was the retail sector, where sales declined.
Exports, excluding precious metals, swung to growth of 7.8% in February from a 20.5% decline in January. It was driven by a 25.4% increase in exports to the bloc, and a 3% drop in imports from the EU.
The ONS advised caution in interpreting the exports data due to a change in the methodology for data collection, but added: “Current investigations indicate the continued strong level of imports from the EU is predominantly the result of genuine increases in trade.”
The ONS said it was too early to see the effect of Russian sanctions on U.K. trade after they were imposed on Feb. 24.
©2022 Bloomberg L.P.
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