GDP figures showed a disappointing quarterly increase of just 0.1% for the first quarter of the year, following +0.4% in Q4 2017. The year-on-year rate slowed from +1.4% to +1.2% in Q1 – giving the lowest rate of growth since Q4 2012. The very weak Q1 data is in part due to poor weather, as seen –by a 3.3% fall in construction. Production continued to grow with an increase of +0.7% in Q1, contributing +0.1% to GDP. Despite a 0.3% growth in services in Q1, adding 0.2% to growth, the trend remained subdued.
UK consumer confidence figures were also disappointing for April, with the GFK Consumer Confidence Index dropping two points to -9. Most of the sub-indices declined, in particular the “personal financial situation over next 12 months”, which dipped six points. Weak consumer confidence is attributed to negative real wage growth. With UK real wage growth starting to turn more positive, we expect a recovery in confidence and spending this year.
After the disappointing UK Q1 gross domestic product (GDP) and consumer confidence report, we now expect the Monetary Policy Committee to hold the Bank Rate in May. The probability of a rate increase as implied by the futures market collapsed to just 22% (down from around 80% last week) after the GDP release. The next rate rise is now anticipated to come in November.
European Central Bank holds rates but remains cautiously optimistic on growth
The European Central Bank (ECB) kept interest rates unchanged at its meeting on Thursday. Monthly net asset purchases of €30 billion will continue until the end of September - or beyond, if necessary.
The ECB struck a cautiously optimistic note on growth and inflation. It remains confident in broad-based growth in the Eurozone and attributed the recent moderation in activity as “temporary”. On the cautious side it highlighted that external risks, such as the threat of increased protectionism, have become more prominent.
The ECB’s narrative on inflation was unchanged from that of the last meeting in March. It said measures of underlying inflation remain subdued overall and headline inflation is likely to hover around 1.5% for the remainder of the year. More optimistically, it continues to see wage growth trending higher as a result of diminishing economic slack and predicts that inflation will rise gradually over the medium term.
We think the highlighting of more prominent external risks and the lack of discussion on monetary policy suggests that the ECB is in a wait-and-see mode. We think it would like to see confirmation of a rebound in activity in the second quarter before committing to details of its policy normalisation plan. We will get more clarity at its June meeting when the new set of macroeconomic forecasts are issued.
Our base case is that the ECB will wind down its quantitative easing (QE) programme at the end of September. However, if weaker activity persists, it may extend QE until the end of 2018. We still think that barring any economic shock, the ECB remains keen to normalise policy given the constraints on the eligible bonds for purchase and the fact that crisis-level support is no longer warranted. Overall, monetary policy is likely to remain accommodative in the medium term, as the ECB will continue reinvesting maturing securities for an extended period of time, and policy rates will remain low “well past” any QE end-date.
Financial markets took a dovish view of the ECB’s communication. Equity indices gained, bond yields fell and the euro retreated.