Households drive UK growth in Q3 again, businesses more wary
1.5 pct y/y matches weakest growth since 2012
LONDON, Nov 23, (Agencies): Britain’s economy again relied heavily on spending by squeezed households for growth in the three months to September, as businesses invested only cautiously while they await clarity on Brexit, official data showed.
The fragile picture of the economy echoed the sharply weaker outlook announced on Wednesday by Britain’s budget watchdog, which prompted Finance Minister Philip Hammond to say he would spend more over the next two years.
The Office for National Statistics said overall economic growth sped up moderately in the July-September period to 0.4 percent from 0.3 percent in the second quarter, confirming a preliminary reading.
But Britain is lagging other big advanced economies, largely due to the impact of last year’s decision to leave the European Union, which has pushed up inflation and left many companies unwilling to commit to new investment while London and Brussels remain at loggerheads over their future ties.
Economy
The economy grew by an annual 1.5 percent in the third quarter, the joint weakest growth in more than five years. Growth was driven by spending by households which rose at its fastest pace in a year, helped by a recovery in car sales which had been weak in the second quarter after a tax increase.
Separate data published on Thursday showed British shop sales rebounded in November after a sharp fall last month, although the number of retailers reporting rising prices hit their highest level since 1991.
Allan Monks, an economist at J. P. Morgan, said he thought the pickup in spending by consumers over the summer would prove temporary, given the still-weak income picture for households and a rise in oil prices that will hit their budgets.
Howard Archer, an economist at forecasters EY Item Club, said the squeeze on consumers should ease in 2018 when inflation is expected to fall back, but that uncertainties about Brexit were likely to weigh further on business investment.
Businesses upped their investment by 0.2 percent in the three months to September, the weakest pace so far this year. Yael Selfin, an economist with KPMG, said a fall in investment in information technology and other machinery and equipment did not bode well for a recovery in productivity, the Achilles heel of Britain’s economy and the biggest factor behind Wednesday’s grim growth outlook.
“It will be particularly important to watch the performance of business investment in coming months, not just as a sign of business confidence in the direction the UK is taking, but also as an indication of whether productivity and future UK growth potential are likely to pick up,” she said.
In another sign of how reliant Britain’s economy remains on its consumers, the ONS said the country’s trade deficit weighed heavily on growth in the third quarter, despite the pound’s fall which some Brexit supporters have said should help exporters.
Rates
The Bank of England, which raised interest rates for the first time in a decade earlier this month, hopes stronger growth among manufacturers will bolster the economy as it faces the challenge of Brexit.
Analysts said the data pointed to GDP growth of 1.5 percent for the year, in line with the government’s latest updated forecasts.
In his annual budget on Wednesday, Hammond had downgraded his growth prognosis up until 2021.
GDP was now expected to expand by 1.5 percent this year, 1.4 percent in 2018, 1.3 percent in both 2019 and 2020, and 1.5 percent in 2021, much slower than expected, Hammond said.
And a marginal pick-up in the headline growth rate for the third quarter of 2017 will do nothing to dispel that gloom, analysts said.
“Despite the modest pick-up in growth in the third quarter and stronger consumer spending, the outlook for the UK economy currently remains challenging,” said Howard Archer, economist at the EY ITEM Club research group.
The Conservative government’s budget was published against a backdrop of high UK inflation that is stretching household incomes.
British inflation has jumped this year as a Brexit-hit pound ramped up import costs, which led the Bank of England to raise its key interest rate for the first time in a decade last month.
And economic output is being hampered largely by long-standing weak productivity — that refers to the average level of output produced per worker or per hour.
“The budget was dominated by the ... slashing of productivity forecasts, which wiped three percentage points off predicted economic growth over the next five years,” the Centre for Policy Studies think tank said on Thursday.
“As a result, Britain will borrow more and is further away from achieving a budget surplus.”
Referring to the UK’s growth situation, Hammond told the BBC on Thursday: “We can either stare at each other and say it’s terrible or we can get on to do something about it.” He added: “What we have decided to do is to invest in infrastructure, invest in training and skills ... to do something about that productivity growth.”
Hammond, however, has had to dig deeper also for Brexit preparations, announcing Wednesday that the government will put aside another £3.0 billion ($4.0 billion, 3.4 billion euros) ahead of the UK’s departure from the European Union due March 2019.
“It’s an absolute obligation on the government to prepare for all the reasonably foreseeable outcomes that could come out of these (exit) negotiations” with Brussels, Hammond told Sky News on Thursday. “We have to make these arrangements and these investments to make sure that things are operating smoothly, that trade and business is not disrupted,” he added.