Weak UK data raises warn­ing flags for 2017

Do­mes­tic de­mand rises, but trade and in­vest­ment weaken

Kuwait Times - - BUSINESS -

Bri­tish con­sumers brushed off June’s Brexit vote and drove the economy to ex­pand faster than ex­pected in the third quar­ter, but a hefty cur­rent ac­count gap and weaker trade and in­vest­ment raised warn­ing flags for 2017.

The economy grew by 0.6 per­cent in the three months to Septem­ber, above its lon­grun av­er­age and beat­ing ex­pec­ta­tions in a Reuters poll of econ­o­mists who ex­pected the Of­fice for Na­tional Statis­tics to stick with its ear­lier es­ti­mate of 0.5 per­cent. The ONS also re­vised down growth for the sec­ond quar­ter to 0.6 per­cent, mean­ing there was no slow­down at all fol­low­ing June’s Brexit vote - con­found­ing pre­dic­tions at the time that the ‘Leave’ vote would push Bri­tain’s economy into re­ces­sion.

With the large ser­vices sec­tor con­tin­u­ing to per­form well in Oc­to­ber, Bri­tain’s economy looks on track to ex­pand by more than 2 per­cent this year - faster than al­most all other big ad­vanced economies ex­cept per­haps the United States. Sterling rose against the dol­lar af­ter the data, hav­ing hit a sev­en­week low ear­lier in the day. But Fri­day’s fig­ures showed no sign that sterling’s sharp fall af­ter the ref­er­en­dum had boosted ex­ports. The pic­ture for trade wors­ened markedly and growth de­pended more on do­mes­tic con­sumer de­mand than pre­vi­ously thought.

“Six months to the day af­ter the Brexit vote, it is clear that 2017 is likely to be a chal­leng­ing pe­riod for the economy, not least in as­sess­ing ‘tra­di­tional’ im­bal­ances in the cur­rent ac­count and the house­hold sec­tor,” In­vestec chief econ­o­mist Philip Shaw said. Econ­o­mists polled by Reuters ex­pect Bri­tain’s growth rate to more than halve next year to 1.1 per­cent.

In­fla­tion squeeze

House­hold spend­ing rose at a quar­terly rate of 0.7 per­cent in the third quar­ter, but at the same time house­hold in­comes ad­justed for in­fla­tion fell 0.6 per­cent - the big­gest drop since early 2014.

House­holds also ate into their sav­ings, with the sav­ings ra­tio drop­ping to its low­est in eight years.

“With high in­fla­tion set to weigh fur­ther on spend­ing power next year, the con­sumer is surely set to fal­ter soon,” said Martin Beck, econ­o­mist at con­sul­tancy EY ITEM Club. Busi­ness in­vest­ment also dis­ap­pointed, with the ONS more than halv­ing its es­ti­mate for in­vest­ment growth in the third quar­ter to 0.4 per­cent.

Net trade sub­tracted 1.2 per­cent­age points from third quar­ter growth, the big­gest drag since early 2012 and com­pared with an ini­tial es­ti­mate that trade had of­fered a 0.7 per­cent­age point boost to the growth rate. This re­flected cor­rec­tions the ONS re­cently made to trade data due to a mis­cal­cu­la­tion in the trade of gold.

Bri­tain’s cur­rent ac­count deficit widened to 25.494 bil­lion pounds ($31.23 bil­lion) from a down­wardly re­vised 22.079 bil­lion pounds in the sec­ond quar­ter. While lower than the 27.45 bil­lion pounds ex­pected by econ­o­mists, it caused the deficit to rise to 5.2 per­cent of gross do­mes­tic prod­uct from 4.6 per­cent - ap­proach­ing a record 6.0 per­cent seen in late 2013.

In the run-up to June’s ref­er­en­dum, Bank of Eng­land Gov­er­nor Mark Car­ney said Bri­tain re­lied on the “kind­ness of strangers” to meet its fi­nanc­ing needs - some­thing that could fade if Bri­tain be­came a less at­trac­tive in­vest­ment des­ti­na­tion. Some econ­o­mists warn Bri­tain could still be vul­ner­a­ble if it looks like it will end up with a bad deal in its di­vorce from the Euro­pean Union. —Reuters

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