UK Q3 GDP (2nd estimate): Scant sign of a Brexit-related uncertainty drag

29 Nov 2016

Philip Shaw

Chief Economist

The second estimate of Q3 GDP saw growth unrevised, as expected, at +0.5% q/q (+2.3% y/y). We have further confirmation, then, that the real economy has held up much better than most economists had expected in the first quarter following the UK’s vote to leave the EU.

  • Moreover, areas of spending vulnerable to Brexit related uncertainty (including business investment and stockbuilding) remained solid, pointing to scant evidence of a Brexit drag on the economy – for now at least.

  • There was little news on the split of Q3 growth by output sector. In line with last month’s preliminary GDP estimate, quarterly growth can be entirely accounted for by the service sector, which expanded by +0.8% q/q (unrevised from last month’s initial quarterly growth estimate). Meanwhile, industrial production contracted by 0.5% q/q (previously estimated at -0.4%) – within that, manufacturing output declined by 0.9%, electricity and gas output shrank by 4.3%, but mining and quarrying (including oil and gas extraction) output rose by 4.3% q/q. The construction sector also saw output decline on the quarter, by 1.1% (initially estimated at -1.4%).

  • More interestingly, today gave us first sight of the breakdown of Q3 GDP by category of expenditure. The largest category of spending in the economy, household consumption, grew at a healthy 0.7% q/q. Perhaps most importantly of all, areas of spending that we have seen as vulnerable to post-referendum uncertainty held up much better than expected. Business investment expanded by 0.9% q/q, versus a consensus forecast of -1.0%. Meanwhile, confounding our suspicion that businesses might have run down their inventories in Q3, there was actually an inventory build of £3.1bn over the quarter, versus the £3.0bn seen in Q2. It appears, then, that businesses have shrugged of the immediate Brexit shock.

  • There was some puzzling volatility elsewhere in the spending numbers. For one, there was a huge downswing in the ‘acquisitions less disposals of valuables’ category. This category, which usually only makes tiny contributions to GDP growth, is estimated to have detracted 0.95pp from the Q3 growth rate. We understand from the ONS that this was driven by a large swing in ‘non-monetary gold’ holdings. We also understand that this swing in gold holdings also shows up in a (very close to) completely offsetting fashion in net trade (both imports and exports), which contributed 0.7pp to quarterly growth. It is hard to say whether this change in gold holdings has anything to do with Brexit. But we do know that, in the absence of this effect, the trade numbers would have been much weaker, which might not bode well for net exports going forward.

  • Looking forward, we do still anticipate a mild, but undramatic, slowdown in the UK economy. Specifically, we see GDP growth decelerating from 2.0% this year to 1.4% next year. That is based on the view that we are still seeing a more uncertain post-referendum business investment environment, while we also foresee an impending real income squeeze on households as post-vote falls in sterling begin to push up on imported inflation. An improvement in net exports (also due to the weaker pound) will likely soften the blow to the economy as a whole. However, if the business spending data continue to exceed expectations, the risks to the post-referendum economy might tilt increasingly to the upside.