UK economic growth undershoots expectations

Growth in the UK economy was slower than expected between June and September, with gross domestic product (GDP) growth slowing to 0.5% from 0.7% in the second quarter of the year.

These results undershot analysts' expectations for growth of 0.6% and take the year-on-year GDP rate down to 2.3% from 2.4% in June. According to the Office for National Statistics, the construction and manufacturing sectors detracted from the growth rate most significantly, with construction activity contracting by 2.2% and manufacturing declining by 0.3% over the third quarter.

Services weathers the storm

In contrast to manufacturing and construction, the UK services sector continues to hold up well, growing by 0.7% between June and September.

This was driven by the business services and finance sector, where activity increased from 0.6% in the second quarter to 1% between July and September.

The mining and quarrying sectors also saw a 2.4% increase in activity while water and waste management grew by 1.2%, both partially offsetting the decline in manufacturing.

The strength of the UK's services sector and headline decline in manufacturing is seen as a worrying sign by some. These include Samuel Tombs, chief UK economist at Pantheon Macroeconomics, who believes Tuesday's data could mark the start of a "pronounced slowdown" in the UK economy.

Deepening manufacturing recession

"The economic recovery has narrowed to become almost entirely dependent on the services sector. The latest surveys suggest that construction output should spring back in the fourth quarter, but the current strength of the pound points to a deepening of the recession in the manufacturing sector, which is twice the construction sector's size.

"Moreover, the services sector is likely to slow too as the fiscal squeeze intensifies, jobs growth fades and inflation rebounds. As a result, we think the consensus view that annual GDP growth will moderate to just 2.4% in 2016 doesn't fully acknowledge these constraints; we expect a more pronounced slowdown to 1.5% next year," says Tombs.

On what the data might mean for UK interest rates, Schroders' senior European economist Azad Zangana says: 'The slowdown will put pressure on the Bank of England to delay the first interest rate hike, especially as inflation remains in negative territory.

"We continue to forecast no change in interest rates until May 2016. The slowdown in growth presents an even bigger challenge for the chancellor as he prepares to find a way to implement substantial fiscal tightening over the course of the next few years."

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