UK growth respite before expected slowdown on weak output, Brexit

Official figures this week are expected to provide fresh evidence that the UK economy remained resilient in the face of Brexit uncertainty at the close of 2016 but economists warn Britain is headed for a sharp slowdown this year.

After confounding most economic forecasters with solid GDP growth of 0.6% in the three months following June’s referendum, the economy is expected to have grown 0.5% in the final quarter of last year, according to a Reuters poll of economists.

Chris Hare, economist at the bank Investec was among those predicting the GDP figures on Thursday would show a strong finish to the year.

“The UK economy has held up remarkably well after last June’s vote to leave the EU. Businesses and households have largely shrugged off the political and economic uncertainties relating to Brexit, keeping the economy running at a decent pace,” he said.

Hopes of solid growth have been buoyed by largely upbeat surveys of businesses and consumers. In particular, the Markit/CIPS purchasing managers’ indices (PMIs) showed the construction, manufacturing and services sectors all grew at the end of 2016 and pointed to 0.5% GDP growth in the final quarter.

Consumer spending is expected to have provided the main momentum behind the UK’s continued growth, helping to make it the top performer among the G7 group of advanced economies last year.

With inflation already at a two-and-a-half-year high and expected to rise further, that support from spending will be harder to maintain, experts warn. The Bank of England expects the weak pound to continue to raise import costs and for some of that to be passed on to consumers, squeezing their spending power. The latest retail sales figures suggested price rises were already affecting shoppers in December as sales volumes suffered their sharpest drop for more than four years.

Hare continued: “Looking forward, we do anticipate a slowdown in economic growth, principally because we see the post-referendum fall in the pound pushing up on import prices, in turn raising the CPI inflation rate to more than 3% later this year. That will squeeze household spending power.”

Samuel Tombs, chief UK economist at the consultancy, Pantheon Macroeconomics echoed that.

“The Brexit vote has done little to dampen GDP growth, so far. Output likely increased by about 0.5% quarter-on-quarter in the fourth quarter, only slightly less than in the third quarter. But labour market and tax receipt data show the economy is starting to struggle,” he said.

“Growth in household spending will slow decisively in 2017 ... surveys continue to point to only slight increases in employment and sluggish wage gains. As such, real disposable income looks set to stagnate for two years.”

If fourth-quarter GDP growth is confirmed at 0.5% in Thursday’s figures, it will be a markedly better outcome than economists had pencilled in at the time of the referendum. Both before and after the June vote, forecasters at the Bank and elsewhere said the decision to leave the EU would bring growth to a near-standstill by the end of the year.

But as economic data repeatedly defied the gloomy predictions, the forecasts were rewritten amid criticism that the Bank and others had overdone their pessimism. Responding to such attacks this month, the Bank’s chief economist, Andy Haldane, said it was fair to describe his profession as being is “in crisis”, having failed to foresee the 2008 financial crash and misjudged the impact of the Brexit vote.

The Bank is still predicting a sharp slowdown in 2017 as the impact of the weak pound and shaken business confidence begin to bite. In its November forecasts the Bank said GDP growth would slow to 1.4% this year from 2.2% in 2016.

The International Monetary Fund is predicting a similar path for the UK, with growth at 1.5% this year. The fund had previously predicted an even sharper slowdown but was forced to concede the British economy had so far beaten its expectations since the June referendum.

Against the backdrop of slower growth and as Brexit negotiations kick off in earnest, interest rates are widely expected to remain on hold at their record low of 0.25% for some time.

In a new economic outlook published on Monday, the forecasting group EY ITEM Club predicts GDP will grow 1.3% this year, marking an upgrade from its October forecast for 0.8% growth. It expects growth to slow further in 2018, to just 1%.

The group warns that with household incomes under pressure, the UK economy will be forced to become less reliant on consumer spending. It notes a silver lining in the weaker pound for exporters, because the currency’s fall makes their goods more competitive overseas. The group forecasts exports will rise 3.3% this year and 5.2% in 2018.

“We now expect the impact of Brexit on the UK economy to be shallower, but more prolonged than we did in October,” said Peter Spencer, chief economic adviser to the EY ITEM Club.

“However, there is a sea change coming over the next three years. The fall in the pound will force the economy to be less reliant on consumer spending, leaving growth heavily dependent upon trade performance.”

This article was written by Katie Allen from The Guardian and was legally licensed through the NewsCred publisher network.