The chancellor claims strong growth, but it’s mostly froth
No chancellor can resist the idea of a good photo opportunity, and Philip Hammond chose a brewery to mark the release of Britain’s latest growth figures. As he pulled a pint for the cameras, his message was that the strongest expansion in almost two years was proof of the underlying health of the economy. It was no such thing. This was a glass mainly full of froth.
On the face of it, the economy has been picking up speed throughout 2018. Growth was 0.1% in the first quarter, 0.4% in the second quarter, and has now hit 0.6% in the third quarter. But what actually happened was that bad weather in the first few months of the year artificially depressed activity and this weakness has been followed by a period of catch-up, especially in the construction sector.
On top of that, a combination of a heatwave and England’s unexpected progress in the World Cup boosted retail spending in July, the first month of the third quarter. In both August and September, the economy flatlined, and forwardlooking surveys suggest a slowdown to 0.2-0.3% in the final three months of the year. Spending in the high street and online fell back after the summer surge, which either means consumers are saving their money for Christmas or retailers are in for a miserable festive season. Either way, the third quarter was as good as it gets for now.
Nor does the breakdown of the flash GDP estimate support Hammond’s argument that the economy is in tip-top shape. Business investment fell by 1.2%, the third quarterly decline in a row. That has not happened since the financial crisis of a decade ago, with the inescapable conclusion that Brexit is leading to firms deferring spending while the talks drag on.
While UK growth accelerated, growth in the eurozone halved from 0.4% to 0.2%.The underlying picture, however, is similar. Growth in the UK has been modest for a decade despite a colossal amount of stimulus. The same applies to the eurozone, where the impact of boosting measures is fading. It wouldn’t take much to turn fragility into something a whole lot worse.