Trade Drives U.K. Economy as Pressures on Consumers Build

Updated on
  • Current-account deficit shows biggest improvement on record
  • Net trade may struggle to offset slowdown in consumer spending

The falling pound delivered a double boost for the U.K. economy in the final three months of 2016 but signs of the pressure on consumers from inflation began to emerge.

A bumper contribution from trade saw gross domestic product grow an unrevised 0.7 percent, its fastest pace in a year. In the same period, the current-account deficit recorded a record improvement, narrowing sharply to 2.4 percent of GDP, the least since 2011.

The improvements in part reflect a narrowing of the trade deficit as the 16 percent drop in the pound since the June Brexit vote boosts exports. Net trade added 1.7 percentage points to growth, the most since at least 2014.

But while trade is expected to underpin the economy this year, it may not be enough to outweigh the hit to consumers from rising food and fuel prices -- the downside of a weaker currency. Economists see growth slowing modestly from 2016’s 1.8 percent.

The pressures on households were evident in the latest figures from the Office for National Statistics. Consumer spending, the engine of the British economy, slowed to growth of 0.7 percent, its weakest pace in almost a year. Adjusted for inflation, household disposable income fell 0.4 percent, the most since early 2014. It was the second straight month of decline.

“Although household spending rose at the end of last year, there was a noticeable worsening in people’s perception of the general economic situation and their own financial positions,” said ONS statistician Darren Morgan.

Saving Ratio

Spending was driven by the willingness of consumers to prioritize spending rather than saving, with the saving ratio falling to a record-low 3.3 percent from 5.3 percent in the third quarter. They may be less willing to keep saving less at a time of heightened economic uncertainty as Britain begins negotiations to leave the European Union.

“The U.K. consumer increasingly appears to be living beyond their means and this cannot continue forever,” said PricewaterhouseCoopers LLP Chief Economist John Hawksworth. “This reinforces our view that we will see a gradual slowdown in the U.K. economy this year as consumers pull in their horns, despite some offset from stronger net exports.”

The trade deficit in volume terms almost halved to 10 billion pounds ($12.5 billion) in the fourth quarter, the smallest in a year. Business investment fell 0.9 percent.

Annualized growth in the fourth quarter stood at 2.7 percent compared with 2.1 percent in the U.S.

Separately, the statistics office said the difference between money leaving the U.K. and money coming in narrowed to 12.1 billion pounds, from 25.7 billion pounds in the third quarter. The 3 percentage point decline as a share of GDP was the biggest since records began in 1955.

The figures will help to allay concerns over the sustainability of the deficit if Brexit makes investors less willing to buy U.K. assets. Economists expect the shortfall to narrow to 4 percent of GDP this year from 4.4 percent in 2016.

Besides aiding exports, the weak pound is boosting the sterling value of income earned on foreign investments. The gap between that and what foreigners earn on their investments in Britain narrowed to a deficit of just 600 million pounds in the fourth quarter from 3.9 billion pounds in the previous three months.

— With assistance by Lucy Meakin

(Adds economist comment in 8th paragraph.)
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