U.K. Brexit Boom Still Sees Economy Plagued by Old Problems

  • Services were sole contributor to growth in fourth quarter
  • Reliance on one sector leaves economy exposed to Brexit shocks

U.K. Economy Defies Brexit in 0.6% 4Q GDP Gain

The U.K. economy is maintaining its stellar performance since the Brexit vote, but the reasons may be cause for concern.

Growth beat expectations again in the fourth quarter, coming in at 0.6 percent, but the make-up of the performance hints at ongoing weak links. The expansion is still being almost entirely driven by services and consumer spending, continuing a trend of lopsided growth in seen in recent years.

While the support is welcome, it may prove unsustainable. Households are borrowing with abandon and saving less, and an expected pickup in inflation through this year raises the risk of a squeeze on incomes. Economists forecast a sharp slowdown this year, and Bank of England of England Governor Mark Carney has warned of pressure from inflation and weaker business spending.

“Today’s data was good, but there are pockets of potential unsustainability in household spending that could drive a slowdown,” said Chris Hare, an economist at Investec Securities in London and a former Bank of England official. The economy’s “rebalancing” toward exports has so far failed to materialize, he said.

Carney said last week that consumption-led growth “tends to be both slower and less durable” as it eventually overtakes earnings. Households borrowed at the fastest pace in more than 11 years in November and credit surged from a year earlier.

The fourth-quarter GDP estimate showed that services jumped 0.8 percent, adding 0.6 percentage point to GDP and offsetting stagnation in industrial production. Within that, the category that includes restaurant and hotels jumped 1.7 percent, the most since 2012.

The growth meant the economy expanded 2 percent in 2016, though that’s down from 2.2 percent the previous year and marked the weakest since 2013. Economists forecast a further slowdown this year, to 1.2 percent.

Andrew Lilico, executive director of London-based consultancy Europe Economics, says there are reasons to be more optimistic. The overall picture “is pretty healthy and there’s scope for construction and manufacturing figures to pick up and every reason to suppose exports will pick up over the next year,” said Lilico, who chaired the pro-Brexit Economists for Britain group.

Restaurant and hotel owner Whitbread Plc warned on Thursday about the potential impact of accelerating inflation on consumers this year, while telecommunications firm BT Group Plc and airline Easyjet Plc both cited Brexit-linked problems in statements this week. The U.K. currency has dropped 15 percent since the referendum in June, fueling inflation by driving up import costs.

Auto industry investment plunged by more than a third last year as carmarkers concerned about Brexit shied away from long-term commitments, according to the Society of Motor Manufacturers and Traders.

“We are in uncertain times economically and politically,” Whitbread Chief Executive Officer Alison Brittain said.

Prime Minister Theresa May plans to start formal EU exit talks by the end of March. She has indicated that she wants to withdraw from the bloc’s single market for goods and services, an outcome that economists say will hurt trade.

Carney was among those who warned before the referendum of a possible recession if Britons voted Leave. Pro-Brexit campaigners have pointed to the economy’s resilience as evidence that leaving the EU won’t make the country worse off.

While the economy has been expanding, so too so has the population, in part due to immigration. So even though the economy as a whole returned to its pre-recession size in 2013, Britain remained poorer on a per capita basis until the end of 2015. GDP grew 2 percent last year whereas output per head rose just 1.3 percent, Thursday’s figures show.

— With assistance by Mark Evans, Harumi Ichikura, Ainhoa Goyeneche, and John Ainger

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