U.K. Economy Gets Rare Trade Boost as Consumer Outlook Dims

  • Economic growth revised up to 0.7% in fourth quarter
  • Slowdown forecast in 2017 amid Brexit inflation squeeze

What Brexit Means For the Future of British Trade

The U.K. ended 2016 on a high, recording an unexpected acceleration in growth thanks to the biggest boost from net trade in almost six years.

The question is whether this new economic mix can persist, with the weaker pound helping to deliver a continued export pickup, offsetting a smaller contribution from shoppers who are about to be squeezed by faster inflation. That would help support the economy through the uncertainty from the looming Brexit negotiations, which will see the U.K. begin the process of untangling itself from a four-decade membership of the European Union.

The latest overview of the economy showed that gross domestic product rose 0.7 percent in the three months through December, revised up from 0.6 percent to what was the fastest pace in a year. Trade and consumer spending provided the biggest contributions as business investment fell.

“The worry is that consumer spending will continue to come under pressure from rising prices and a cooling of the labor market,” said Chris Williamson, an economist at IHS Markit in London. “At the same time, there’s a real risk that the business mood will be dampened as Brexit-related uncertainty intensifies. It therefore seems likely that 2017 will see the U.K. economy struggle to achieve anything like the performance seen in 2016.”

Consumers have kept the economy going since the Brexit vote but signs of strain are now appearing. Credit growth slowed sharply in December and retail sales grew at their slowest annual pace in more than three years in January. The pound has fallen 16 percent since the referendum in June, boosting the cost of imports.

The Bank of England expects the economy to grow 2 percent this year, it said this month, revising up a previous prediction of just 1.4 percent. Economists surveyed by Bloomberg expect a much weaker pace of 1.4 percent, which would be the slowest since 2012. The economy grew 1.8 percent in 2016.

The European Commission said on Wednesday that net exports will contribute positively to growth this year and next, mitigating weakness in domestic demand. It still expects slower expansion, at 1.5 percent and 1.2 percent.

The GDP data showed household spending rose 0.7 percent in the fourth quarter, down from 0.9 percent in the previous three months. Business investment dropped 1 percent. Exports gained 4.1 percent and imports fell 0.4 percent, meaning net trade added 1.3 percentage point to growth -- the biggest contribution of any category. It represented the largest boost from trade since the start of 2011, though statisticians cautioned that figures prior to 2014 are not strictly comparable.

Poorly Supported

BOE Governor Mark Carney has warned that households will probably tighten their belts in 2017. That would leave the economy poorly supported. Government austerity is continuing and firms may decide to put off investment as Britain embarks on its protracted divorce negotiations. Trade is also unreliable; it’s only boosted growth three years in the past decade.

“All the indicators until quite recently, until six weeks ago, were consistently surprising in the direction of being stronger than we thought,” BOE official Gertjan Vlieghe said on Tuesday when asked about the consumer outlook at a hearing before lawmakers. “In the last four to six weeks, it’s become decidedly more mixed.”

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