4Q2017 GDP grew at 1.4% y/y, the weakest performance since 2Q2012, putting the UK in the last place among the G7 countries for that quarter. For the full year, the GDP grew 1.8% which is in line with our projection.

Looking at 2018, slowing inflation and signs of better wage growth are lifting consumer confidence, and households are the most upbeat about their finances since before the recession. Still, we see Brexit as the most significant influence on, and source of uncertainty about the economic outlook. We expect the GDP to grow around 1.5% in 2018 and 1.3% in 2019 and 2020.

Meanwhile, despite the recent drop in inflation, it is still above the Bank of England’s target of 2.0% and in comparison with the Eurozone and the US. This encourages the central bank to raise rates to which we have placed a 60% chance of a rate hike in May with a 40% chance of another rate hike in either November or December.

• 4Q2017 GDP grew 1.4% y/y from the previous reading of 1.5% y/y but unchanged from the second estimate in February. This marked the weakest y/y performance since 2Q2012, putting the UK in last place among the G7 countries for the quarter. Quarter-on-quarter, the GDP rose 0.4% versus 3Q’s 0.5%. In line with our projection, the full year of 2017’s GDP was at 1.8% from 1.9% in 2016.

• Driven by business services and finance, the service sector which accounts for a significant 80% of total GDP increased at the same pace as in the previous quarter by 1.4% y/y after having been on a declining trend since end-2014. Meanwhile, production and construction sectors slowed to 1.9% y/y and 2.3% y/y respectively with the latter down by more than half the rate in the previous quarter.

• Gross Fixed Capital Formation (GFCF), which reflects investment in physical capital, grew at 4.0% in tandem with the business investments (BI) which improved by 2.6% y/y relative to 3Q2017. Both of these areas of economic activities were at negative growth rates in 1Q2016 and 2Q2016, the period leading up to the Brexit referendum but have since returned to the positive region. Household consumption expenditure (HCE) decelerated to 1.4% y/y in 4Q2017.

• Slowing inflation and signs of better wage growth are lifting consumer confidence, and households are the most upbeat about their finances since before the recession. It does provide some hope to retailers who have warned of a challenging environment and are showing signs of financial distress. Still, we see Brexit as the most significant influence on, and source of uncertainty about the economic outlook. We expect the GDP to grow around 1.5% in 2018 and 1.3% in 2019 and 2020.

• Meanwhile, despite the recent drop in inflation, it is still above the Bank of England’s target of 2.0% and in comparison with the Eurozone and the US. With the headline inflation more than double the 1.2% rate in the euro area and above the US rate of 2.2% which encourages the US Fed to push up interest rates by another two more times, we are pricing a 60% chance for the UK central bank to raise rates in May with a 40% chance of another rate hike in either November or December.

Source: AmInvest Research - 30 Mar 2018