The second estimate of GDP was unrevised from the preliminary figure, confirming growth at 0.5% q-on-q in 2015 Q4. This follows q-on-q growth at near 0.5% in each of the previous three quarters, indicating that UK economic expansion has settled at a solid 2% annualised, rather slower than in the earlier phase of the upturn when annualised growth was nearer 3%.
Service sector growth was a robust 0.7% in 2015 Q4, with a particularly strong contribution from the accommodation and food services sub-sector, with q-on-q growth of 2.2%. The service sector’s advance outweighed weakness in construction, where output shrank by 0.4% and in production, which posted a 2.3% decline largely due to weak oil and gas output. Manufacturing, after sizeable declines in the previous two quarters, was unchanged in the latest quarter.
Analysis of the expenditure components of GDP shows that consumer spending remained the key growth driver, expanding by 0.7%, slightly short of the rate seen in recent quarters. General government spending was 0.5% higher, but fixed investment fell slightly (by 0.1%) for the second quarter in a row.
Net trade constituted a drag on overall growth with exports falling by 0.1% as lacklustre global demand hampered overseas sales while imports rose by 1.2%, in line with buoyant consumer demand. Conditions for exporters are set to remain difficult despite the recent depreciation of the pound as demand from the key EU market remains subdued while global trade is exceptionally weak.
Given the bleak trade outlook, household spending remains crucial to the ongoing UK economic upswing. Other elements of domestic demand can also play a part, but constrained government spending and the recent easing of fixed investment highlight the importance of consumers. Furthermore, uncertainty over the forthcoming BREXIT referendum adds to the risks around business confidence and investment prospects. So while still healthy employment growth and the prolonged low interest rate stance should underpin improving household finances and GDP growth in the year ahead, clearly the downside risks to these forecasts have increased.