Services Drive UK Growth Momentum as Exports and Manufacturing Falter

Kristian Rouz — British GDP growth accelerated in Q4 to 0.5% quarter-on-quarter, driven by substantial gains in the nation's service sector, even though manufacturing underperformed and the current account deficit still casts a shadow over expansion outlook. Yearly gains in the UK's economy slowed to 1.9%, their slowest in two years. Meanwhile, the ill situation in energy and the trembling financial sector also hint at the insufficiency of British production to sustain current momentum. While a rebalancing of the economic structure might have been a solution, the Bank of England's (BoE) lack of room to implement monetary policies makes it a more distant prospect.

According to a London-based Office for National Statistics (ONS) report, the quarterly gains of the UK's GDP accelerated to 0.5% from 0.4% in Q3, generally confirming economists' earlier projections. The services sector, which comprises a whopping 79% of the nation's economy, grew at a faster pace of 0.7% in Q4, with the financial sector driving momentum. However, the subsequent carnage in stocks in early 2016 suggests, the driving force might have ebbed afterwards.

"Despite turbulence in the global economy, Britain is pushing ahead," George Osborne, Chancellor of the Exchequer, said. "With the risks we see elsewhere in the world, there may be bumpy times ahead."

Employment is on the rise and is at its highest in roughly a decade, with only slightly above 5% of the workforce out of a job. Falling crude prices supported the domestic consumption of goods and services as well, contributing to an increase in households' disposable incomes with fuel costs lower. Additionally, real salaries' growth was also solid, driving the main sector of the economy.

However, excessive reliance on one (albeit the largest) sector of the economy, is not a sustainable enough strategy, meaning the UK might enter the murky waters of economic slowdown this year. Overall industrial production dropped 0.2%, while manufacturing was flat in Q4, and the balance sheet is negative. That said, hardly any new sources of growth emerging in the economy soon enough to make up for the turbulence in the financial sector, which is likely to hit next quarter's expansion.

In December only, the ONS said, services gained 0.3% from 0.2% a month earlier, but, again, the financial volatility came about in January, hardly bucking the trend. The decline in domestic manufacturing slowed in December compared to previous month to 0.2%, while construction outperformed expectations, gaining 2.2% in the last month of the year after November's decline.

While the UK growth outlook might be softening, the nation seems stronger economically than most of its peers except Germany, which is enjoying robust manufacturing and a massive current account surplus. The US Q4 GDP estimate is due Thursday, and is expected to have displayed an annualized growth rate of 0.8%.

Against the background of the slowing global economy, the services-driven British expansion is, however, an example of a healthier domestic  economy. The sluggishness in manufacturing is stemming partially from international headwinds such as low oil prices; however, competitiveness is still an issue, as evidenced by current account figures.

"It's good news that the economy is growing steadily, meaning more jobs and security for people. Global risks mean we will stick to our plan," British PM David Cameron tweeted.

Yet, while the size of the overall UK economy and the services sector in particular are 12% and 6%, respectively, above their pre-crisis readings in Q1 2008, sectors like construction, industrial production and manufacturing remain 4-10% below their Q1 2008 figure.

In 2015, economic expansion slowed to 2.2% from 2.9% in 2014, with oil market risks weighing significantly, as the UK is a major oil and natural gas producer. According to International Monetary Fund (IMF) estimates, the pace of UK growth will remain the same in 2016, while the US economy is forecast to grow 2.6%.