'Mid-cycle Slowdown': UK Economy Weakens

Last Monday (11 February), the Office for National Statistics revealed UK GDP expanded by 0.2% in Q4 2018, down from 0.6% in Q3 and missing analysts' expectations of 0.3% growth.

Furthermore, annual GDP growth for 2018 was the lowest in six years with Brexit uncertainty weighing on business investment.

The weak data was then solidified on 13 February when UK inflation fell below the BoE's 2% target in January to 1.8%, its lowest level in two years.

Consumer Price Index (CPI) inflation has been on a downward trend since hitting a five-year high of 3.1% in November 2017, driven mainly by the lessening impact of sterling's fall following the vote to leave the EU in June 2016.

This has also significantly impacted the markets' interest rate expectations.

For example, last October, the EY Item Club changed its forecast for future interest rates from two rate rises in 2018 and two in 2019 to no further rate rises until August this year and then two in 2020.

The two pieces of weak data come a week after the BoE's Monetary Policy Committee voted unanimously to maintain rates at 0.75% while cutting UK growth forecasts to 1.2% this year, down from 1.7% predicted three months ago, the lowest since 2009 and the largest downgrade since the 2016 referendum.

The MPC's minutes blamed the "intensification" of uncertainty surrounding the Brexit negotiations.

Major pressure was placed on BoE governor Mark Carney last year to increase the pace of interest rate rises amid high inflation, higher wage growth and the tightest labour market in decades.

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However, with inflation retreating and Brexit uncertainty continuing, this pressure has fallen back and been replaced by a nervousness throughout global markets about the pace of tightening monetary policy.

Nancy Curtin, CIO at Close Brothers Asset Management, said the sluggish UK economy is "symptomatic" of the wider picture with central banks across the globe taking their foot off the stimulus pedal.

"We are indisputably in a mid-cycle slowdown," Curtin continued.

"A global recession seems a far flung prospect, however, in the UK Carney must be flexible and data-driven, putting decisive monetary policy on the back burner until greater political and economic clarity emerges."