UK Economic Growth Faster Than Thought, But Brexit Concerns Mount

The British economy lost its title of the fastest-growing advanced economy in 2016, giving way to Germany, but the uptick in growth in the last quarter stirs some optimism amid the still-lingering post-Brexit anxiety.

Kristian Rouz – UK economic growth outpaced the previous estimates for the last quarter of 2016 due to the robust pickup in domestic manufacturing, yet, as the consequences of Brexit have started to weigh on consumer confidence and demand, this year is likely going to be more tumultuous for the Albion.

The increased throughput costs in the industrial sector took their tool, but the recovery in oil prices and the still-high confidence amongst Canary Wharf’s financial enterprises supported the economic acceleration.

The UK economy posted a 0.7-percent expansion in 4Q16 compared to earlier preliminary estimates of 0.6pc, the Office for National Statistics (ONS) reported. However, for the entire 2016, the ONS downgraded its growth estimate to 1.8pc from an earlier reading of 2pc, thus depriving the UK of the status of the quickest-growing advanced economy in the world.

Sterling dropped in Wednesday’s currency trading on the news, even though Q4 growth was the most solid since late 2015.

With the consequences of the Brexit referendum starting to weigh on domestic consumer demand and confidence, the UK is increasingly looking forward to the Chancellor of the Exchequer Philip Hammond-promised fiscal stimulus. The increased budget spending is poised to revive the broader economic confidence across the UK.

However, Hammond, whose yearly budget announcement is due on 8 March, has stated recently that there is no need to increase governmental borrowing thus jeopardising the budget consolidation agenda. The solid macroeconomic data somewhat support his conservative view of the budget.

"Overall, the dominant services sector continued to grow steadily, due in part to continued growth in consumer spending, although retail showed some sign of weakness," Darren Morgan of the ONS said.

A slight decline in business investment in the fourth quarter is somewhat of a concern as lower profitability of the traditional industries and high uncertainty surrounding the manufacturing sector have impaired business confidence. Higher factory input costs are to blame, as the rise in oil and industrial metal prices, as well as the sterling’s slide, have marred the industrial sector projections.

British private sector capital investment slid 1pc in Q4 from the previous quarter, and was at £43.5 bln, half-a-million down from Q3. Expenditure on IT and telecoms, transport and logistics all dropped in the fourth quarter, but the pickup in manufacturing activity might offset these losses in early 2017 as output and exports gain momentum.

“The difference is well within the margin of error on any such early GDP estimates," John Hawksworth of PwC said. "Excluding oil and gas output, estimated UK GDP growth might actually have been revised up in 2016."

German economy added 1.9pc in 2016, having thus outpaced the UK as a consequence of the weaker euro and more robust exports in manufactured goods.

Amidst the ongoing expansion in domestic consumption, which drives some 79pc of the UK economy, household spending added 0.7pc during the period, whilst salaries and wages posted an uptick of only 0.1pc, raising sustainability concerns.

However, as broader inflation gains momentum, worker compensation is poised to increase in manufacturing more significantly. This might be offset, nonetheless, by the contraction in other sectors of the economy, hit by Brexit and the disruption of ties with the continent.

All these trends are pointing at gradual and at times painful post-Brexit readjustment, accompanied with a slower overall growth this year.