07 Mar 2017
Overall, the latest raft of economic figures confirmed that the UK economy remained resilient in the second half of last year. The second official estimate for Q4 2016 UK economic growth stood at 0.7%, up from the previous estimate of 0.6% and is the fastest rate of growth since Q4 2015. In annual terms, UK GDP was up by 2.0% in Q4. The upward revision was driven by manufacturing sector output growing more strongly than previously expected. Manufacturing output rose by 1.2% in Q4, up from the previous estimate of 0.7%. This meant that total industrial output increased by 0.3%, up from the previous estimate of zero growth. Construction output rose by 0.2% in Q4, up from the previous estimate of 0.1%.The service sector remains the main driver of UK GDP growth with output from the sector growing by 0.8% in Q4 and accounting for 80% of the growth recorded.
Elsewhere, the UK’s public finances enjoyed a strong January. UK public sector finances (excluding public sector banks) recorded a surplus of £9.4 billion in January 2017, the highest since May 2000. This improvement means that the government is likely to undershoot the Office for Budget Responsibilities borrowing forecast for this financial year. The public finances in January typically show a surplus, as it tends to be a strong month for tax receipts due to the timing of self-assessment tax returns.
However, the latest economic data also reinforce concerns over the UK’s near-term economic outlook.
The second estimate of Q4 GDP growth data revealed that business investment fell by 1% in Q4 2016. For 2016 as a whole, business investment dropped by 1.5%, the first decline since 2009.Rising inflation is an increasing challenge to both businesses and consumers. UK CPI inflation stood at 1.8% in January 2017, the highest rate since June 2014. There is also further evidence that inflationary pressures in the supply chain are intensifying with factory gate prices recording their seventh consecutive period of annual growth, and are now at their highest since December 2011. UK inflation remains on course to breach the 2% inflation target, possibly as early as this month. Significantly, annual earnings growth, including bonuses, slowed from 2.8% to 2.6%. With consumer price inflation rising to 1.8% in January, the differential between price increases and wage growth continues to close.
There are signs that the pressure from rising inflation is starting to weigh on consumer spending which is an important determinant of UK growth.Retail sales fell by 0.3% in January, the third successive monthly decline. In annual terms, retail sales were up by 1.5% in January, the weakest rate of growth since November 2013. On the rolling three month-on-three month measure – a better indicator of the underlying trend – retail sales fell by 0.4% in January, the first decline since December 2013.If consumer spending, which accounts for around two-thirds of UK economic output, does weaken this could trigger a broader economic slowdown.
So is UK growth flattering to deceive? Although the UK economy enjoyed a strong end to 2016, higher inflation, uncertainty over Brexit and the increasing up-front costs of doing business in the
UK, are likely to mean that conditions will become more challenging in the coming months.