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Pound surge continues as GDP spike surprises

Pound surge continues as GDP spike surprises

The UK economy grew 0.5% in the last three months of the year, ahead of a forecast of 0.4%, which was immediately perceived as weighting the odds in favour a further rate rise in 2018.

The increase in gross domestic product compared to 0.4% in the prior quarter, and was driven by a 0.6% increase in service sector output and the same rate of growth in industrial production.    

Following a remarkable recent run against the US dollar which has taken sterling back to a pre-Brexit high, the pound was up another 0.78% on Friday morning to $1.42. Against the euro sterling was up 0.32% at €1.14, trading at the top of an eight month range.

The unexpected boost, following a somewhat lacklustre 12 months, took annualised GDP growth to 1.5%, down from 1.7% in the prior quarter but still beating a consensus 1.4%.   

‘But 2018 still looks likely to be a lacklustre year,’ cautioned Samuel Tombs, chief UK economist at Pantheon Macroeconomics.  

‘Admittedly, the squeeze on real incomes from inflation will fade, but consumers face a tougher fiscal squeeze this year and can’t continue to reduce their saving rate. More firms likely will activate contingency plans and pause on domestic investment as the Brexit deadline moves closer, while sterling’s recent appreciation will take the edge off exports growth.’

He pointed to a third consecutive fall in construction output, down 1% in the quarter, as increasing evidence of a slowdown in capital expenditure.

Hargreaves Lansdown senior economist Ben Brettell, echoed that view, saying the numbers remained consistent with an economy ‘muddling through’ rather than discovering a renewed energy.

He said that the immediate strength of conviction in sterling would likely prove misplaced, however.

‘With growth anaemic, I can’t see any rush to raise rates. Last year’s quarter point move seems like a tacit admission that the cut to 0.25% was unnecessary in the first place, rather than the start of a sustained upwards trend.’

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