Surprise boost for GDP thanks to services sector

Britain’s economy performed better than expected in the fourth quarter thanks to the country’s powerhouse services sector, though there are warning signs of “slower and uneven” growth.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.5% in its initial estimate for October to December last year, following growth of 0.4% in the third quarter.

Economists had been expecting growth of 0.4%, according to consensus figures, though a minority had forecast a slowdown to 0.3% on the back of a temporary shutdown of a major North Sea oil pipeline last month.

The biggest impact came from the UK’s services sector, which accounts for around 79% of the economy. Services grew 0.6% quarter on quarter, with business and financial services making the biggest contribution.

However, the ONS said longerterm trends were pointing to a broader slowdown.

ONS head of GDP Darren Morgan said: “Despite a slight uptick in the latest quarter, the underlying picture is of slower and uneven growth across the economy.

“The boost to the economy at the end of the year came from a range of services including recruitment agencies, letting agents and office management.

“Other services – notably consumer-facing sectors – showed much slower growth,” he said, referring to industries such as distribution, hotels, catering, transport and communications.

“Manufacturing also grew strongly, but construction again fell.”

The UK economy is still struggling to bounce back to levels seen in the final quarter of 2016 when GDP rose by 0.6%.

Sterling rose sharply against the dollar following the news, flirting with $1.43, up 1% on the day. Against the euro, the pound was up 0.4% to €1.14.

Manufacturing growth contributed to a 0.6% rise for production industries over the quarter – but that was partly offset by a “significant” fall in oil and gas extraction due to the temporary closure of the North Sea Forties pipeline over the bulk of December after a routine inspection found a hairline crack in the pipe just south of Aberdeen.

Construction contracted for the third straight quarter, this time by 1%, while agriculture shrank 0.4%.

The ONS said the UK is likely to have seen economic growth of around 1.8% for the whole of 2017, a slightly slower rate than 2016 when it grew 1.9% and marking the weakest rate since 2012 when the economy expanded 1.5%.

The International Monetary Fund (IMF) earlier this month slashed the UK’s growth outlook from 1.6% to 1.5% for 2019, the year it quits the European Union. For 2018, the IMF forecasts UK growth of 1.5%. The organisation previously said that Brexit uncertainty and the inflation squeeze on household spending would put the brakes on the UK economy. The Washington DCbased group said firms are likely to continue deferring investment decisions until there is greater clarity on the UK’s future trading relationship with the EU.

Howard Archer, chief economic adviser to the EY ITEM Club, said: “Fourth-quarter UK GDP surprised on the upside, coming in at 0.5% quarter-on-quarter. This was the best performance since the fourth quarter of 2016. The economy gradually picked up through the second half of 2017 after a muted first-half performance.

“GDP growth was 1.8% in 2017. This was a significantly better performance than had been widely expected at the start of the year, given the major Brexit uncertainties that were expected to – and duly did – persist through the year. Additionally, there was a major squeeze on consumer purchasing power.”