UK GDP growth slows to 0.5% following Brexit

Despite the slowdown, the economy has grown faster than predicted in the gloomier forecasts ahead of June’s vote

Zlata Rodionova
Thursday 27 October 2016 08:50
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Several economists say the real test of the Brexit vote will come in 2017
Several economists say the real test of the Brexit vote will come in 2017

The pace of the UK economy has slowed in the first official verdict on how the economy has performed after the UK voted to leave the EU in June.

Growth in the three months to September dropped to 0.5 per cent, down from 0.7 per cent in the April to June quarter, according to data from the Office for National Statistics (ONS).

Despite the slowdown the figures are stronger than the 0.3 per cent, expected by economists.

Britain’s economy has now grown for 15 quarters in a row, and is 8.2 per cent higher than the pre-economic downturn peak in early 2008.

The figures also beat the latest forecast from the Bank of England policymakers, who were predicting that third quarter growth would come in at 0.1 per cent.

Joe Grice, head of the Office for National Statistics, said the figured show there is "little evidence" of a pronounced effect in the immediate aftermath of the vote.

The economy was mainly boosted by a strong performance from the services sector, which grew by 0.8 per cent.

Industrial production suffered from a 0.4 per cent contraction, while Construction output fell by 1.4 per cent, the biggest decline since 2012.

Chancellor Philip Hammond, who is due to announce his post-referendum budget at the end of next month, said the ONS data shows that the economy is “resilient”.

Brexit uncertainty will 'weigh on growth'

He said: “We are moving into a period of negotiations with the EU and we are determined to get the very best deal for households and businesses.”

However, the medium and long-term outlook for the UK's gross domestic product remains fragile, especially since talks of a so called hard Brexit, which means leaving the single market and an end to freedom of movement, emerged at the conservative party conference earlier this month.

The Federation of Small Businesses (FSB) warned that companies still face uncertainty.

"The growth we have seen is, in no small part, due to small businesses’ hard work and resilience. This comes against a backdrop of unavoidable economic uncertainty following the referendum result, coupled with growing domestic challenges. In fact, 62 per cent of businesses in our most recent survey cited the domestic economy as a barrier to growth," Mike Cherry, FSB chairmain said.

Meanwhile, several economists say the real test of the Brexit vote will come in 2017.

Kathleen Brooks, research at City Index, said next year could be tough as higher inflation hits wages.

She said: "The biggest risk for UK growth is a sharp slowdown in business investment that could become more pronounced in the coming months, once the UK government has triggered Article 50. If the UK looks set to lose its access to the single market, then we may see the consumer show signs of stress, which could knock the UK economy seriously off course, and potentially plunge us into recession."

Fears of the consequences of a hard Brexit sent the pound tumbling to a new 31-year low against the dollar in October.

The pound has fallen by 18 per cent against the dollar since the EU referendum and has briefly hit a new six-year low against the euro last week - a weaker currency is expected to drive prices higher as it makes imports more expensive.

Sterling rose to a high of $1.2273 just after the data was released and its highest since October 20. However, it quickly erased earlier gains dropping back to $1.2192, 0.4 percent lower on the day at market closing time.

Thomas Laskey, a fund manager at Aberdeen Asset Management, said: “The outlooks for growth is pretty uncertain. Brexit has the potential to be extremely costly to the UK and the country could be poorer as a result. We’ve already seen this reflected in sterling’s dramatic drop. Growth will probably slow as import costs increase and people’s incomes fall as inflation rises. We are not out of the woods yet by any means.”

While Jeremy Cook, chief economist at the international payments company World First, said we should have a better picture of the economic impact of Britain's decision to leave the EU once Theresa May has triggered Article 50.

He said: “The services sector singlehandedly drove growth to a 15th consecutive positive quarter and while the ‘little evidence of a pronounced effect’ from the Brexit vote is being seen yet, we think that it will be as gradually obvious as the year comes to an end. The beast will tire as inflation fires arrows at its increasingly weakening hide.”

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