Posted by

Suren Thiru

13 Jan 2017

So far so good. The end of the 2016 coincided with a raft of economic data highlighting the resilience of the UK economy in the wake of the EU referendum. The third official estimate of UK economic growth was revised up to 0.6% in Q3 2016, from the previous estimate of 0.5%, driven by stronger business and financial services output which rose by 0.8% in Q3, up from the previous estimate of 0.3%. However, UK growth was downwardly revised in Q1 from 0.4% to 0.3% and from 0.7% to 0.6% in Q2. Despite the revisions, economic output remains 8.1% above its pre-recession and confirms that the UK economy is growing in line with historic trends.

The Q4 2016 BCC Quarterly Economic Survey (QES) - the UK’s largest and most authoritative private sector business survey - indicates that the UK economy continued to grow at a solid rate in the final three months of last year. Having slowed significantly in the previous quarter, the services sector has rebounded, although it’s not yet back to levels seen at the start of the year. Nonetheless, the service sector is likely to have been the key driver of growth in the quarter. Manufacturers, particularly those that export, continue to report positive indicators. Overall, the latest QES data suggests that the UK economy grew in line with its long-term trend in the final quarter of 2016.

However, our own survey data also indicates that inflation is emerging as a rising concern for many firms. Both manufacturing and services firms are under pressure, particularly from the rising cost of inputs, which is squeezing margins and may weaken future investment. The official data is starting to back this up. UK CPI inflation rose to 1.2% in November 2016 - the highest rate since October 2014 - and up from the 0.9% rise recorded in the previous month.

The latest economic data also confirms that UK continues to face major structural challenges. For instance, the UK's current account deficit - the gap between what the UK earns and spends - stood at 5.2% of UK GDP in Q3 2016, higher than the 4.6% recorded in Q2 2016. The UK's current account deficit in Q3 is more than five times the long-term average of -1%. The deterioration was largely driven by the widening in the UK’s trade deficit which almost doubled from £7.3 billion in Q2 to £13.6 billion in Q3 2016.  The scale of the UK’s current account deficit continues to leave the UK vulnerable to rapid changes in economic conditions and a further downgrade to its credit rating.

So, what about the prospects for 2017? While there remains a high degree of uncertainty over the near-term outlook for UK growth, the recent resilience in UK growth is expected to weaken. Higher inflation and continued speculation over Brexit will weigh on the UK’s growth prospects, with consumer spending and business investment likely to be hardest hit. The escalating burden of up-front taxes and costs faced by businesses is also likely to soften investment intentions. Average earnings should hold steady but inflationary pressures are expected to erode real wages, which will hit the spending power of households.

Exports will continue to grow but at a slower pace, and the UK’s net trading position is expected to improve as import levels weaken. The decline in the value of the pound is likely to help some exporters, although the lack of responsiveness of UK exports to other sterling devaluations in recent years suggest that its impact on overall export growth has been overstated.

Overall, the BCC currently expects that UK GDP growth will slow to 1.1% this year, which if realised would be the weakest outturn since 2009 - but still growth nonetheless. As ever forecast projections are never a ‘done deal’ and just as the significant loosening in monetary policy helped to shift growth projections for 2016, so too can the outlook for growth this year if the government acts strongly to support investment and improve the business environment – both of which are crucial to boosting business confidence, and therefore further growth.