If you’re a regular reader of our economic updates you could be forgiven for getting a sense of déjà vu as you look at this month’s summary. We again report that since the EU referendum the economy has largely continued to perform well (on the back of the service sector) and that economists expect growth to slow in 2017 (with consumers expected to rein in their spending, in the face of higher prices).
Growth revised up
The economy grew by 0.6% in the quarter following the EU referendum (July-September 2016) compared with the previous three months. The ONS had previously estimated growth in the quarter to be slightly lower at 0.5%. Growth continues to be in keeping with its pre-referendum performance and as the ONS’ chief economist points out, it is driven by consumer spending:
“Robust consumer demand continued to help the UK economy grow steadily in the third quarter of 2016. Growth was slightly stronger than first thought, though, due to greater output in the financial sector.”
Growth was driven entirely by the service sector – it was the only broad sector of the economy to grow during Q3 2016. The importance of the service sector for economic growth is a reoccurring theme in our monthly summaries. The sector’s output is 12% higher than its pre-recession peak. In contrast output from manufacturing and production remain 6% and 8% below pre-recession levels respectively. Construction has recovered to its 2008 level.
More positive news
In keeping with the growing service sector, retail sales data remain strong: over the three months to November 2016, the value of retail sales was up 2.4% compared with the previous three months. Consumer confidence is also fairly upbeat.
Confidence indicators from manufacturing and services industries have been positive. The Manufacturing Purchasing Managers’ Index, an important indicator of output and confidence in the sector, reached a two-and-a half year high in December.
The labour market remains in relatively good health – the unemployment rate is the lowest it has been since July-September 2005.
The FTSE-100 – which tracks the share-prices of the 100 largest companies listed on the London Stock Exchange – closed at its tenth successive record high on 11 January 2017.
Words of caution for 2017
The pound has fallen by 1.2% against its major trading partners in the early days of 2017. Sterling is now 13.2% lower than its pre-referendum level.
Economists expect the lower value of the pound – which makes imports more expensive – to feed through to the prices paid by consumers, as businesses pass higher costs onto consumers.
The higher import prices have been felt in the early stages of the supply chain in recent months. The prices of materials and fuels bought by UK manufacturers for processing were 12.4% higher in October 2016 compared with a year ago. Much of the price growth was due to imported goods and crude oil.
For consumers the important thing is whether higher supply chain costs get reflected in the price they pay for products. Consumer prices, on the CPI measure, have been increasing in recent months. Prices were 1.2% higher in November 2016 compared with a year ago. The ONS say that more import-intensive products, including energy, have been the main driver of price increases in recent months.
Economists expect consumer prices to continue to rise during 2017 and, as a consequence, the purchasing power of consumers to fall, leading them to cut back on spending. Falls in consumer demand are expected to slow economic growth. On average economists expect the economy to grow by 1.3% in 2017.
This article was originally published in the January edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.