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U.K. Gained Momentum at End of 2016 on Trade, Consumer Spending

The U.K. economy grew more than previously estimated in the final three months of 2016 but it may be the last hurrah.

Gross domestic product rose 0.7 percent instead of 0.6 percent, the Office for National Statistics said on Wednesday. It followed growth of 0.6 percent in the previous two quarters. Trade and consumer spending provided the biggest contributions as business investment fell.

The willingness of consumers to spend has kept the economy going since the Brexit vote but signs of strain are now appearing as accelerating inflation squeezes household incomes. Credit growth slowed sharply in December and retail sales grew at their slowest annual pace in more than three years in January, recent figures showed.

“Like a slow puncture, we suspect that the economy will gradually lose air as the year proceeds,” Howard Archer, an economist at IHS Markit in London, said this week.

Household spending rose 0.7 percent in the fourth quarter, down from 0.9 percent in the previous three months. Exports rose 4.1 percent and imports fell 0.4 percent, meaning net trade added 1.3 percentage point to growth -- the biggest contribution of any category. Business investment dropped 1 percent, as firms pared spending on information and communications technology and other equipment.

Consumer Slowdown

The upward revision to the fourth quarter was largely due to manufacturing. Services grew an unrevised 0.8 percent. The sector expanded 0.2 percent in December, similar to the pace of the previous two months.

GDP rose 2 percent in the fourth quarter from a year earlier, revised from a previous estimate of 2.2 percent.

A slowdown in consumer spending risks leaving the economy poorly supported. Government austerity is continuing and firms may decide to put off investment as Britain embarks on protracted divorce negotiations with the European Union in the coming weeks.

Growth is forecast to slow to about 1.4 percent this year from 1.8 percent in 2016 and traders see a less than 20 percent chance the Bank of England will raise its benchmark rate from a record-low 0.25 percent by the end of the year.

AG Markets Review

Wednesday, 22 Feb, 2017 / 10:04

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