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UK's 0.8% first quarter growth gives Carney rate 'headache'

by Dylan Lobo on Apr 29, 2014 at 09:49

UK's 0.8% first quarter growth gives Carney rate 'headache'

The UK economic growth hit a four-year high in the first quarter of 2014.

According to the Office of National Statistics (ONS), the economy grew by 0.8% in the first quarter versus a 0.7% growth in the final quarter of 2013. The reading was slightly below initial estimates of 0.9% growth.

Output increased in three of the four main industrial groupings during the quarter, with services, production and construction rising by 0.9%, 0.8% and 0.3% respectively. Agriculture was the weak link, contracting by 0.7%.

"This is the fifth consecutive quarter of steady growth. Overall, the economy is now only 0.6% below the pre-recession peak at the beginning of 2008,' ONS chief economist Joe Grice said.  

'In fact, services are now 2% above the pre-recession peak but the production and construction sectors are still around 12% lower.'

The reading leaves the UK firmly on track to deliver the best performance in the G7 in 2014 and raises the prospect that interests rates could be lifted from a five-year low.

Close Brothers Asset Management chief investment officer Nancy Curtin outlined the dilemma this poses for Bank of England governor Mark Carney.

'The UK’s economy has accelerated from escape velocity into overdrive. Unemployment is at a five year low, consumer spending power is returning as wages rise against inflation, and the trade deficit is narrowing,' Curtain explained.

'On top of this, government borrowing continues to fall. We have not seen the end of austerity, but at this pace of recovery, we are going to feel it less keenly every quarter.

'This underlying economic strength gives Mark Carney the sort of headache he will welcome. The MPC cannot wait too long before announcing a normalisation of interest rates, or it risks being completely behind the curve and introducing sharper, more damaging hikes further down the line.' 

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