Britain’s economy grew faster than expected in the fourth quarter of 2016, according to a preliminary GDP release from the Office for National Statistics on Thursday.
According to data from the ONS, GDP grew by 0.6% in the quarter, in line with the consensus forecast by economists that saw growth increase by 0.5%.
On an annual basis, growth has also been better than expected, with UK GDP growing by 2.2% over the past 12 months, compared to a forecast of 2.1%.
The data was closely watched as the fourth quarter was only the second full quarter of activity after Britain’s historic vote to leave the European Union. Initial predictions of economic disaster following the Brexit vote have so far failed to materialize – apart from the collapse of the pound sterling – and economic data has held up broadly.
UK GDP has now grown for 16 consecutive quarters. The last time UK GDP shrank by more than a quarter came in the fourth quarter of 2012, when the economy readjusted to normalcy after a huge boost from the 2012 London Olympics.
The chart below shows quarterly GDP for the UK over the past 10 years or so:
Growth in the quarter was again largely driven by a booming services sector, which grew 0.8% from the previous three months. Services – which represents everything from the bank to the waitress – is the dominant sector of the UK economy, accounting for around 80% of all GDP. Therefore, when it performs well, so does the economy as a whole.
“Strong consumer spending supported the expansion of the dominant services sector and although manufacturing rebounded from a weaker third quarter, it and construction were broadly unchanged for the year as a whole,” said Darren Morgan, ONS GDP Manager. declaration.
The boom in the services sector helped to mask the sluggish growth of the production, construction and agricultural sectors. Here’s more from the ONS, illustrating just how dominant the service sector was last quarter (emphasis ours):
“During the fourth quarter (October to December) of 2016, UK GDP is estimated to have increased by 0.6%, with growth being led by services. The services aggregate was the only contributor the percentage change in GDP from one quarter to another to 2 decimal places. Production, construction and agriculture each contributed 0.00 percentage point to the overall figure.”
And here is the breakdown by sector:
At first glance, the growth numbers look encouraging, but Samuel Tombs of Pantheon Macroeconomics argues that they have “all the characteristics” of unsustainable growth.
Here is an excerpt from a data note sent to customers shortly after publication (emphasis added):
“The economy’s rapid growth at the end of 2016 has all the hallmarks of being driven by an unsustainable consumer spending spree. The 0.8% quarter-over-quarter increase in services output was led by consumer-oriented sectors. In particular, the production of the distribution, hotel and catering sector increased by 1.7%, representing 0.3 pp of the increase in the production of services. The pick-up in inflation and the slight decline in employment in the fourth quarter suggest that real household incomes were no higher than in the third quarter, so consumers appear to have taken on debt to spend more. “
UK exporters have reported a substantial improvement in their competitiveness thanks to the fall in the pound since the Brexit referendum. As the pound falls, UK goods sent overseas become cheaper for importers, meaning UK exporters are able to sell more.
The fall in the pound may be positive for businesses, but not for consumers as it pushes inflation higher, making daily expenses more expensive.
Inflation has risen following the pound’s dramatic fall in recent months, hitting 1% in October, the first time in about two years that it has reached this level. It has since continued to climb and now stands at 1.6%, with expectations that by the end of the year, price growth could be between 3 and 3.5%.
Although growth was stronger than expected, it was in line with the previous quarter. GDP also increased by 0.6% in the third quarter of 2016.