UK: Despite a slight pick-up in growth in the fourth quarter, the Brexit effects are undeniable

The UK economy can count itself lucky that the global economy is going as well as it is right now. Otherwise the headwind of the forthcoming Brexit would be much more apparent. As it was, it once again achieved solid growth in the final quarter of the previous year. With growth coming in 0.5 percentage points above the previous quarter, the result was in fact somewhat better than in the quarters before. Measured against the country’s history, however, current economic growth is still rather mediocre, compared with booming economies elsewhere and growth rates that are well above-average.

Thanks to strong exports, the manufacturing industry is booming in the UK as well; the previous quarter’s increase represented the second consecutive rise of more than one per cent – a performance not seen in the last seven years. Had its weighting in the UK economy not fallen as sharply as it did in the last 30 years (the manufacturing industry meanwhile accounts for not much more than 10 percent of economic output, compared with roughly 20 per cent in Germany), the balance of growth would look better now.

However, private consumption is the most important pillar supporting the UK economy and it is increasingly losing momentum. Growth here halved last year and consumer-related services, such as wholesale and retail trade, or the catering trade, hardly grew at all in the final quarter. Consumers are growing more and more sceptical and are increasingly curtailing larger purchases in particular. Vehicle registrations for example fell by more than five per cent last year. While the UK automotive industry sells considerably more vehicles abroad, domestic sales were sluggish.

The UK economy is divided, largely due to the weak pound. Despite creating tailwind for exports as a result of the strong devaluation following the Brexit vote, this drove inflation up sharply at the same time – one man’s gain is another man’s loss. UK consumer prices are currently some three percent higher than last year, which is much more than we are seeing at the moment in many other industrial nations. Even though UK inflation is unlikely to rise much more, it is expected to remain high for quite some time yet. This leads to shrinking real wages and is squeezing purchasing power.

Where will the UK economy go from here? This depends mainly on the progress made in the Brexit negotiations. Realistically, conclusive results are not expected before late summer of this year. Concerns that the talks could still fall through and the UK moves towards a “hard Brexit” will probably increase in the months ahead. Companies will no doubt pull out their emergency plans and organise the first office moves. This will weigh on investment. The construction industry is already in recession. Economic growth is likely to roughly halve this year compared with the good growth figure of 1.8 per cent in 2017 – ultimately, this is still a good result in light of the risks arising from the EU exit. If a reasonable Brexit compromise is on the table by autumn, we could see the growth rates picking up again in the year ahead.

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