Economy reaches two-year high but shows signs of slowing
The UK economy expanded at the fastest pace in two years during the third quarter but has begun showing signs of a slowdown before Brexit as more investment decisions are put on hold.
In what is likely to be a peak for the economy this year, the latest snapshot from the Office for National Statistics (ONS) showed GDP growth in the three months to the end of September was 0.6% – the fastest expansion since the final quarter of 2016.
But growth has begun to falter as the boost to the economy from the warm weather over the summer and England’s performance at the World Cup has fizzled out. GDP growth flatlined in August and September, with signs of weakness in business spending, retail sales and a fall in domestic car purchases.
City economists had forecast growth of 0.1% in September, but the UK economy unexpectedly stagnated for the second month in a row, as new car registrations fell by a fifth in the worst September for the motor trade in a decade.
Although there are gathering signs of weakness as the country braces for Brexit on 29 March next year, on an annual basis the British economy grew by 1.5%.
Philip Hammond, the chancellor, said on a visit to the Fuller’s brewery in London just two weeks after the budget that the growth rate was “proof of the underlying strength in our economy”.
There are however mounting signs of underlying weakness as the prime minister, Theresa May, struggles to agree a Brexit deal with the EU, with business investment dropping at the fastest rate since early 2016.
The latest figures reveal a contraction in corporate spending of 1.2% during the third quarter, marking the first time business investment has slipped for three consecutive quarters since the global financial crisis a decade ago.
Azad Zangana, senior European economist at the City fund manager Schroders, said Brexit was among the reasons for businesses to delay investment decisions. “Although more recently those delays are turning into cancellations, with almost daily announcements of manufacturing jobs losses and plant closures as firms shift production out of the UK,” he added.
The largest contribution to growth in the third quarter came from UK services. Net trade contributed 0.8 percentage points to GDP growth, with a 2.7% increase in exports versus stagnant growth in imports.
Construction output continued to accelerate following a weak start to the year, when freezing weather forced cranes and diggers across Britain to fall idle. Quarterly output in manufacturing also rose for the first time in 2018.
With an expansion of 0.6% in the third quarter, the latest figures suggest the UK economy grew three times faster than that of the eurozone, after growth in the bloc dropped to 0.2%.
The Office for Budget Responsibility estimates UK growth will drop to 1.3% in 2018 from 1.7% last year – which would make 2018 the worst year for the economy since the recession in 2009.
Economists said much of the acceleration during the third quarter would have come as companies and businesses caught up on purchases and sales made earlier in the year.
Samuel Tombs, of Pantheon Macroeconomics, said: “Two consecutive months of stagnation in GDP [August and September] underline that the economy has little momentum and that the strong quarter-on-quarter growth rate simply reflects the weather-related rebound.”
▲ The chancellor, Philip Hammond, tours Fuller’s brewery in London with the head brewer, Georgina Young, before the GDP figures announcement