Although the United Kingdom may have reported a slight acceleration in economic growth for the third quarter just ended, at just 0.4 percent, the UK’s quarter-on-quarter GDP growth remains average at best. Indeed, in the first and second quarters of the year, Britain’s economic growth rate was the lowest of the world’s seven largest industrialized nations. Annual growth now stands at just 1.5 percent. In other words, UK growth has more than halved within two-and-a-half years – primarily, although not exclusively, due to the country’s impending exit from the EU.
The drivers of the slowdown in the quarter just ended were the same as in the first half of the year: The services sector, the most important growth engine of recent years, is again only exhibiting moderate growth. In particular, consumer-related services such as retailing and gastronomy once again revealed their weakness. Consumer spending is therefore likely to have remained weak. The British consumer is increasingly suffering from a loss in purchasing power with respect to imports. These are becoming much more expensive, which is in turn attributable first and foremost to the significant decline in the value of the pound since the Brexit vote. Indeed, inflation has now reached the three-percent mark, well in excess of UK wage growth, with the consequence that real wages are declining.
The good news in the latest growth figures is that the economy did not lose any further momentum during the summer months – despite the electoral debacle presided over by Prime Minister Theresa May, and despite the extremely unsatisfactory progress being made in the Brexit negotiations in Brussels. This pleasing aspect is attributable to the positive development of the manufacturing sector, which in the third quarter grew at its strongest rate for more than a year. Moreover, sentiment in manufacturing continues to be extremely robust. Companies are pleased about the positive effects of the weak pound for exports, which are likely to post record growth this year.
That said, quite how long the export industry can prop up the economy of the British Isles is open to question. Fears that the UK could ultimately suffer a “hard” – or even a disorderly – Brexit are likely to rise over the next few months. The manufacturing climate would hardly thrive under such circumstances. As an additional factor, the relocation plans of numerous London-based banks are taking ever clearer shape, and some of these are likely to progress to the implementation stage over the course of the next year. Not only would this act as a further brake on the growth of the services sector, it would also weigh on the UK construction activity, which is already teetering on the edge of recession as things stand. By next year at the latest, GDP growth can be expected to decline yet further. The UK economy is therefore continuing to run “with the handbrake on”. Finally, if the Bank of England were to reach for the interest rate lever to address the problem of temporarily high inflation, this could place an additional burden on the British economy.