UK GDP growth to accelerate on back of stronger services sector

Jasper Jolly
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Consumer spending has remained stronger than expected in the face of high inflation (Source: Getty)

Stronger order books for services sector companies will drive an acceleration in the UK economy, according to an index tracking major business surveys.

The findings of surveys by the Bank of England, the Confederation of British Industry, and other organisations show the UK can expected an annual rate of GDP growth of around two per cent in the first quarter of the year, according to analysis by accountancy firm BDO to be published today.

BDO’s output index grew to a reading of 99.63 in January, up from from 98.45 at the end of last year – a move towards the 100 mark which indicates the long-term average growth rate.

Read more: The UK economy is actually growing faster than we thought

City economists predict growth will slow to 1.4 per cent this year, according to an average of forecasts collected by the Treasury, a weakening from the 1.8 per cent expansion seen during 2017 as the UK approaches Brexit.

However, recent data has given some grounds for optimism, with the strength of the global economy benefiting firms in the services sector, which dominates the UK’s output.

Meanwhile, consumer spending has remained stronger than expected even as inflation has consistently outpaced wage growth, although a January increase in the BDO inflation measure will indicate a potential continuation of those pressures.

At the same time the manufacturing sector is still enjoying a “sweet spot”, according to the Bank of England, with weaker sterling helping exporters in particular. Manufacturing output is growing at levels above the long-term trend, BDO will find.

Read more: Economists await a tale of two economies in the UK and Europe

Peter Hemington, a partner at BDO, said: “British businesses have made a strong start to 2018 despite the ongoing uncertainty about our nation’s future outside of the EU. However, if the government continues to stall on providing a clear Brexit strategy for businesses, the performance of UK firms will suffer.”

“We need the government to align quickly and communicate its Brexit plan. It is crucial so that UK businesses can make informed investments to best prepare for the future.”

The UK’s long-term trend growth averages around two per cent per year, although since the financial crisis that has fallen significantly, as flagging productivity growth has weighed down the economy.

A big downgrade for productivity growth prospects by the independent fiscal watchdog, the Office for Budget Responsibility, was a major reason for the lack of fiscal headroom left for the government at November’s Budget, in a belated recognition of the potentially structural forces holding back the UK economy.

Read more: UK retains place among European nations best prepared for future growth

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