The UK economy has held up better than most forecasters had expected in the immediate aftermath of the Brexit vote. The first full measure came in Thursday's gross domestic product (GDP) figures for the third quarter. They showed a 0.5 per cent quarterly rate of growth, ahead of the 0.3 per cent average expectation. Year on year the UK economy is moving ahead at 2.3 per cent, positively stellar by comparison to most of Europe's economies.
So what’s happening and what does it mean?
Let’s look first at the breakdown.
The figures show the UK services sector – which accounts for 80 per cent of the economy – is driving growth, not least because of strong box-office takings for big movies such as Star Trek, which helped that sector retain some "warp speed". However, construction, agriculture and – most significantly – manufacturing are all shrinking.
Standing back, it suggests confidence was not as severely hit as many expected by the Brexit vote in the immediate aftermath of the poll. It may mean that the Bank of England will hold off from another interest rate cut next week, although analysts are still divided on this one. In turn, this will be important to the shorter-term trend in sterling. Sterling gained briefly after the announcement but was soon back more than 89p to the euro.
Momentum
Put simply, the figures suggest the UK economy had considerable momentum heading into the Brexit vote and has held up okay in the meantime. But most forecasters still expect a slowdown to hit moving into next year as the boundless frontier that is Brexit takes its toll.
This would be driven by two factors. The first is a decline in business investment, with surveys suggesting this is already on the slide, although the announcement on Thursday of Nissan’s expansion in Sunderland could help this.
The second is the squeeze on consumer incomes from the fall in sterling and the related rise in import prices, which is expected to lead to a spending hit. At the moment, most forecasters expect UK GDP growth to slow to well below 2 per cent next year.
With political factors in play and the shape of Brexit unclear, it is fair to say that more than unusual uncertainty applies to these predictions.
Thursday’s GDP figures are just the latest sign of how hard forecasting is when political factors are the key to driving business and consumer confidence.
