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UK growth misses forecasts, but overall picture still positive

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UK economic growth slowed by more than expected to 0.5% in the final quarter of 2014, according to today’s official figures. 

According to Ben Brettell, senior economist at Hargreaves Lansdowne though, this estimate should be taken with a ‘pinch of salt’ as revisions are common and its is based on less than half of the date required for the final estimate.

“Slowing growth is undesirable, but should prove no cause for concern,” says Brettell. “2014 as a whole saw healthy growth of 2.6% – the strongest since 2007, and faster than every member of the G7 bar the US. The IMF recently downgraded its global growth forecast, but left its prediction for UK growth in 2015 unchanged at 2.7%. However, its chief economist Olivier Blanchard cautioned that the weakness of the euro zone could act as brake on the British economy.
 
“The most significant development in recent months has been the sharp fall in the oil price, which is now feeding through to lower retail energy costs. This, combined with the return of wage growth, should keep consumer spending strong and the economy buoyant.
 
“Some commentators are becoming concerned that the recovery is increasingly reliant on the services sector (which represents more than three-quarters of output). Indeed today’s figures showed that growth was not broad-based – the services sector grew by 0.8%, contributing 0.62 percentage points to the overall figure. This was in contrast to a modest contraction in output from the production and construction sectors – see chart below. Exporters of manufactured goods are currently battling against a slowdown in the euro zone and China, though many should be helped in due course by lower oil prices.
 
“Despite relatively strong growth, the falling oil price is keeping a lid on inflation and should mean interest rates stay lower for longer. The minutes from the Bank of England’s latest policy meeting showed the MPC believes inflation will fall to zero in March, with a 50% chance it will drop below zero at some stage in the first half of this year.
 
Although Mark Carney has promised the Bank of England will ‘look through’ the effect of lower oil prices, it is difficult to see calls for higher rates gaining any traction while Mr Carney is writing to the chancellor to explain severely below-target inflation.”

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