United Kingdom: Growth rate confirmed at moderate pace in the third quarter
November 23, 2017
The British economy picked up pace slightly in the third quarter of the year, according to comprehensive data released by the Office for National Statistics (ONS) on 23 November. Growth was confirmed at 0.4% quarter-on-quarter, a tad above Q2’s 0.3%. On an annual basis, the expansion was also confirmed at 1.5% in Q3, matching Q2’s figure. Despite the slight uptick, the UK’s growth was mediocre compared to the rate of expansion in the rest of the European Union, which is currently enjoying something of an economic sweet spot. It is also average by recent domestic historical standards, particularly given the tailwind provided by buoyant demand from key trading partners.
Growth in the third quarter was driven by solid private consumption (Q3: +0.6% quarter-on-quarter; Q2: +0.2% qoq), due partly to greater car purchases. At first glance, the expansion in private consumption seems strange, given that inflation is outpacing wage growth and retail sales figures are weak, but it is being driven by consumers borrowing more and driving down their savings. A recent European Commission report predicted that the savings rate would fall to 4.8% in 2017 from 7.1% in 2016. Fixed investment growth was weak (Q3: +0.2% qoq; Q2: +0.6% qoq), likely a reflection of businesses holding off on investments due to pervasive Brexit uncertainty. Public consumption was also constrained as the government attempts to trim the budget deficit (Q3: +0.3% qoq; Q2: +0.1% qoq).
In the external sector, exports shrank 0.7% qoq (Q2: +1.7% qoq) on the back of lower goods exports, while imports grew 1.1% (Q2: +0.2% qoq), led by higher imports of fuels and machinery and transport equipment. As a result, the net contribution from the external sector swung from plus 0.4 percentage points in Q2 to minus 0.5 percentage points in Q3. The latest figures show that the external sector is struggling to gain traction despite the weaker pound, and the rebalancing of the economy away from private consumption and towards export-oriented growth has yet to take place.
Kallum Pickering, Senior Economist at Berenberg, is quick to highlight that the economy’s performance is far from scintillating:
“While the short-term risks to demand since the Brexit vote have not materialized in a serious way, the UK economy should be riding high on the back of the ongoing global upswing. Uncertainty from Brexit is weighing on firm and household confidence.”
Looking ahead, growth is likely to remain lackluster, as fixed investment is dampened by Brexit uncertainty and private consumption growth dips on the back of low nominal wage growth and a slight softening in the labor market. However, solid external demand and loose monetary policy—despite the BoE foreseeably engaging in further monetary tightening—should prop up the economy.
UK GDP Forecast
The Central Bank expects the economy to expand 1.6% in 2018 and 1.7% in 2019. FocusEconomics panelists take a less optimistic view, and project GDP will expand 1.3% in 2018 and 1.4% in 2019.
Author: Oliver Reynolds, Economist