27 Jan 2017

UK GDP (Q4 1st estimate): UK growth exceeds expectations…. again!

Philip Shaw

Chief Economist

UK GDP growth was a touch stronger than expected in Q4, with a q/q expansion of +0.6% (consensus and Investec +0.5% q/q). That is a healthy growth rate, equal to the rise seen in Q3 and broadly in line with historical averages.

  • Year-on-year growth also looks fairly solid, at +2.2% y/y. Today’s data confirm that, in the months following the UK’s vote to leave the EU, the economy has held up remarkably well – a far cry from the near-recessionary scenario we had feared in the immediate aftermath of the referendum. There are scant signs (yet) of a Brexit-related slowdown in the economy.

  • The details of the Q4 data show that, one again, the all-important service sector (worth nearly 80% of the economy) was the major driver of growth, posting an expansion of +0.8% on the quarter. Within that, the ONS noted that retail trade performed particularly strongly, suggesting that UK consumers are continuing to shrug off uncertainties relating to Brexit.

  • The manufacturing sector joined the party too, with growth of +0.7% q/q. But we are wary about concluding that post-referendum falls in sterling are beginning to provide a major fillip to goods exporters – the quarterly rise follows a 0.8% q/q decline in Q3 and was mainly driven by the pharmaceuticals industry, where output can be volatile. Industrial production as a whole was flat on the quarter though, held back by a slump in oil and gas output as a result of shutdowns on the Buzzard oil field. The construction sector continues to show lacklustre growth (+0.1% q/q); government austerity is weighing on public sector work, including infrastructure.

  • In today’s data release, it is hard to find much corroboration of the view that Brexit is weighing on the economy. One possible caveat is that the ONS reckons that services growth dropped to zero in December, compared with monthly growth of +0.3% in October and November, respectively. Indeed, it is the services sector which we expect to slow this year as rising inflation bites into household real incomes and spending. However, only around one-third of this December estimate is based on hard data so should be treated with caution.

  • Meanwhile, other indicators of activity in December have remained solid. Our mapping suggests that the December ‘composite’ PMI – the best survey read there is on near term activity – would still be consistent with GDP growth in excess of 1Ž2% q/q. And this morning also saw the release of BBA mortgage approvals and lending data – they showed mortgage approvals rising to a 9-month high of 43.2k in December, with consumer credit growth picking up to a striking +6.6% y/y.

  • We do still expect the modest slowdown in economic growth this year. Brexit related uncertainty has not disappeared and might begin to weigh noticeably on business spending. More importantly, the sterling-related inflation squeeze on households is only just beginning – we expect the inflation rate to roughly double by the end of this year from the latest (December) estimate of +1.6% y/y. Given the prospect of Brexit headwinds blowing harder, we still see the Bank of England ‘looking through’ temporarily higher inflation by maintaining Bank rate at 0.25% until at least the end of 2018.