Last year, the UK rebounded from Brexit concerns by becoming the fastest growing economy in the G7, according to the Office for National Statistics (ONS). The G7 countries include the US, Canada, France, Germany, Italy, Japan and the UK.
The ONS calculated that UK Gross Domestic Product (GDP) rose by 0.7 per cent, up from 0.6 per cent. This adjustment was a result of better than expected performance from the manufacturing industry. The last three months of 2016 were particularly strong, countering some of the damage caused by lacklustre performance in early 2016.
However, despite this positive report, the UK lost its title as the fastest growing economy in the G7, handing over the mantle to Germany after the ONS cut its estimate for 2016 growth to 1.8 per cent - a reduction from the 2 per cent it forecasted in January 2017.
Germany has now taken the lead with its growth estimated at 1.9 per cent. Yet we may still be surprised: John Hawksworth, Chief Economist at PwC told the BBC that the percentage difference is well within the margin of error for early GDP estimates.
The downward revision was driven by weaker North Sea oil and gas production in the first half of 2016 – without which UK GDP growth might have been revised up in 2016, according to Mr Hawksworth.
Consumer-focused industries, such as retail sales and travel agency services performed well in 2016, with additional good news from manufacturing and construction – despite volatility earlier in the year. However, consumer spending is likely to be hampered by rising inflation, and the spending volumes that have already been seen may not be sustainable.
“The economy’s brisk growth at the end of 2016 has all the hallmarks of being driven by an unsustainable consumer spending spree,” Samuel Tombs of Pantheon Macroeconomics told the FT. He added: “Consumers appear to have turned to debt to spend more.”
Although consumer borrowing continued to rise in December, according to figures from the British Bankers’ Association, the demand for credit will likely become softer as businesses and households wait for more clarity on interest rate rises and Brexit.
This hesitation has become particularly visible in business activity. The ONS recently reported a slowdown in business investment, with “subdued growth” and a 1 per cent fall in investment during the last quarter, compared to the previous quarter. As the country draws closer to a possible triggering of Article 50, Brexit concerns are clearly impacting business confidence.
A short respite may be on the cards though: in its Inflation Report released in February, the Bank of England upgraded the UK’s 2017 growth forecast to 2 per cent. However, this is with the expectation that growth will fall to 1.6 per cent in 2018 and 1.6 per cent in 2019, based on the predicted negative impact of Brexit on the economy.
The Bank of England believes that by 2019, UK GDP will be around 1.5 per cent lower than its pre-Brexit forecast for the same period; the shortfall will equate to around £30 billion. Much of the UK’s economic future hangs on the nature of Brexit. Until we know more, investors await.