Mon | Aug 21, 2017

UK economy still going strong

Published:Friday | January 27, 2017 | 1:00 AM

British consumers spurred faster-than-expected economic growth in the last three months of 2016, but experts warn a slowdown may be on the way as the country's plans to leave the European Union curtail spending and investment.

The economy grew 0.6 per cent in the fourth quarter from the previous three months, according to figures released Thursday by the Office for National Statistics. That was the same rate as in the second and third quarters and better than the 0.5 per cent figure economists had estimated.

It means the British economy grew two per cent over the full year, the fastest rate among the seven most developed countries.

While the British economy has defied expectations since the June 23 referendum to leave the EU, investor concerns about leaving the trading bloc of 500 million people led to a sharp decline in the pound.

The currency's weakness has helped some parts of the economy, like exporters and tourism, but is likely to make imported goods more expensive, eating into households' ability to spend.

"Consumers won't be ramping up spending, thanks to rising inflation and sluggish wage growth, and businesses' appetite to sign off big investments will depend on how they view the progress of Brexit negotiations," Lee Hopley, chief economist at EEF, a manufacturers' trade group. "There's every chance that this rate of expansion is the high point for the next couple of years."

The fourth quarter figures were driven by service businesses, with strong contributions from retail sales and travel - consumer-based industries that capitalised on public confidence. Manufacturing bounced back from a weak third quarter.

Government leaders have pointed to Britain's performance as evidence that the impact of leaving the EU won't be as dire as some analysts predicted. Some had forecast a recession after the vote that never materialised.

But while the drop in the pound may have helped somewhat by making exports more competitive and encouraging tourists to visit and shop in Britain, it is widely expected to also weigh on domestic spending going forward. A weaker currency is making imports more expensive, as well as commodities like oil and gas, which are priced in dollars.

"Although the UK economy may have been the best performer in the developed world last year, 2017 is a new epoch, and Brexit risks to the economy are likely to materialise in the coming months. The weakness in production and manufacturing suggest that the UK economy has been propped up entirely by the services sector and the consumer," said Kathleen Brooks, the research director for City Index. "The UK economy's resilience could be at risk if Brexit fears start to hit consumer confidence in the coming months."

Earlier data showed that retail sales in December fell at their fastest rate in nearly five years, with shoppers skipping purchases on clothing, shoes and household goods.

Dennis de Jong, managing director at UFX.com, noted the growth came despite global uncertainty, Donald Trump's victory in the United States and the prospect of a sharp break with the European Union, including an exit from its single market.

"The effect of both will be long-lasting, with a sharp slowdown expected at some point later this year," he said.

- AP