23 Dec 2016

Six months on, pondering growth and imbalances…

Philip Shaw

Chief Economist

Today signifies the sixth month mark following the EU referendum. Amid the pre-Christmas UK data rush, Q3 GDP growth was revised up to +0.6% on the quarter from previous estimates of +0.5% (consensus and Investec estimates +0.5%). But prior quarters were revised down. Growth in Q2 is now recorded at +0.6% (previously +0.7%) and that for Q1 at +0.3% (+0.4%). Overall the level of GDP in real terms is reckoned to be a touch less than 0.1% below estimates a month ago.

From the perspective of sectoral output, the estimate of services growth was pushed up to +1.0% from +0.8%. This principally reflects upgrades to output in the insurance sector thanks to ‘actual’ figures replacing forecasts. We would note that the robust showing by the sector generally (the strongest quarterly growth since Q4 2015) in part reflects a temporary surge in output from the UK film industry.

Consumer spending growth in Q3 was essentially unrevised at +0.7% on the quarter, in line with the prevailing pace over the first half of the year. With CPI inflation poised to exceed 3% over the course of 2017, we remain of the view that household spending (in real terms) will slow next year, as pay growth struggles to match the rise in prices. Interestingly business investment growth was nudged down to +0.4%, from what seemed to us to be a surprisingly firm +0.9%. We tend to mistrust second estimates of business investment slightly less than the first set, but in any case we will keep a close watch on the series as this area of the economy is one of the major Achilles heels to prospects for 2017.

We usually pay some attention to the relative performance of export and import volumes at this stage of the GDP release calendar, to draw some conclusions over the (lack of) rebalancing in the UK economy. However data for Q3 have been less reliable than usual thanks to difficulties in measuring movements in so-called non-monetary gold holdings. Last month we reported that a material rundown of such holdings had caused a large, negative swing in the ‘acquisitions less disposables of valuables’ category in the expenditure components, but that this had been offset by a surge in exports, leaving GDP growth unaffected. This release suggests the opposite picture, namely a substantial positive swing in valuables, but sagging exports. If one adds in the valuables component as an export category, the contribution of net trade to GDP growth was -0.2%, about the same as the average over Q1 and Q2. On these figures one would have to hope that the fall in the exchange over the past year will help to deliver a boost to exports and a more balanced position.

The household balance sheet looks more lopsided. Real household disposable income dropped back by 0.6% in Q3, the first quarterly decline since Q1 2015. Coupled with the 0.7% rise in consumer spending noted above, the saving ratio fell to 5.6% (from 6.1%), its lowest level since Q3 2008, the period when Lehman Brothers collapsed.

Last, full current account numbers for Q3 were released. These showed the deficit widening to £25.5bn from £22.1bn (consensus £28.2bn, Investec £27.9bn), the third highest on record and equivalent to 5.2% of GDP. However another word of warning. These figures will also be affected by movements in non-monetary gold holdings, which are arguably not part of the underlying trade picture. Adding the valuables series back in (i.e. removing them from imports) suggests a more modest shortfall of £22.2bn. Even so this is still a considerable 4.5% of GDP. On a slightly brighter note the UK’s deficit on (investment) income narrowed to £5.0bn from £8.7bn, thanks to a recovery in returns from direct investment.

Overall the figures do tend to confirm that the pace of economic activity has been more solid that feared post-referendum, albeit partly supported by temporary factors. 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 balance sheet.

Last but definitely not least, the London Economics team would like to wish everyone a very Merry Christmas and all our best wishes for 2017!