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Is the shine finally fading from the UK economy?
Britain’s annual growth rate has been downgraded from a first estimate of 2 per cent to 1.8 per cent in 2016, despite registering a better than expected expansion at the end of the year.
A second official estimate from the Office for National Statistics found that weaker growth at the start of the year pushed down on the annual growth rate.
Fourth quarter expansion however accelerated to 0.7 per cent from the 0.6 per cent in the immediate aftermath of the Brexit vote – marking the best pace in 12 months, helped along by improvements in net trade and industrial production.
Still, economists widely expect growth to slow further in 2017 as higher inflation pinches consumer spending. Here’s our roundup of what analysts make of it all.
Chris Williamson at Markit thinks today’s GDP release “is marred by worrying signs about the durability of the upturn”:
A slowdown in consumer spending and a drop in business investment raise questions about the extent to which such strong growth can be sustained. Consumer spending rose by 0.7 per cent, making the weakest contribution to the economy for a year, while business investment fell 1.0 per cent.
These data add to concerns that cracks are developing, with households pulling back on spending as higher inflation bites and Brexit clearly a major source of uncertainty.
It therefore seems likely that 2017 will see the UK economy struggle to achieve anything like the performance seen in 2016, and it will need a skilfully-managed Brexit process to limit any slowdown and help the economy grow by the 2.0 per cent expected by the Bank of England.
Samuel Tombs at Pantheon also strikes a grim note this morning, noting that the UK’s recovery is “worryingly dependent on debt-fuelled consumption”.
He expects the consumer-led boom to soften significantly this year “depleting the economy’s overall momentum”:
Households clearly financed the increase in spending in Q4 by borrowing more; indeed, the compensation of employees rose by just 0.1 per cent quarter-on-quarter in Q4.
Consumers appear to have brought forward big-ticket purchases from the first half of 2017, because they expected prices to rise sharply this year.
The collapse in retail sales over the last two months supports that story. This shift in the timing of consumption, alongside the intensification of the pressure on real incomes from rising inflation and slowing employment growth, suggests that household spending will grow only modestly over the next couple of quarters, depleting the economy’s overall momentum.
John Hawksworth, chief economist at PwC takes a more sanguine approach, highlighting that the figures do not change the fact the economy took the Brexit vote in its stride:
The UK continued to grow steadily during the six months following the Brexit vote.
The main reason for the downward revision seems to have been weaker North Sea oil and gas production during the first half of 2016; however, this is a sector-specific trend that does not really reflect the underlying strength of the UK economy. Excluding oil and gas output, estimated UK GDP growth might actually have been revised up in 2016.
Looking ahead, we still expect some slowdown in UK growth to an average of around 1.5 per cent in 2017 and 2018 as higher inflation bites into consumer spending power.