GDP growth of 0.5% in the three months following the EU referendum was in line with its trend of recent years and above most forecasts. However, with inflation expected to increase over the next year due to the fall in the pound, consumers may rein in their spending, potentially resulting in slower GDP growth.
The first estimate of GDP following the EU referendum showed that the economy grew by 0.5% in July-September 2016 compared with the previous three months. This was faster than most economists anticipated, particularly when compared with forecasts made in the run-up to the referendum and in its immediate aftermath (many expected only very modest growth or a contraction in GDP).
Compared with a year ago GDP growth was 2.3%.
The ONS chief economist noted growth was in keeping with its pre-referendum performance:
“While quarterly growth has fallen slightly [from 0.7% in Q2], the economy has continued to expand at a rate broadly similar to that seen since 2015 and there is little evidence of a pronounced effect in the immediate aftermath of the vote.”
Growth was driven entirely by the services sector (accounting for nearly 80% of the economy) which grew by 0.8%, while the other sectors all saw falls in output: construction declined by 1.4%; industrial production was down by 0.4%; and agriculture contracted by 0.7%.
Strong services growth is in line with robust retail sales data in the months following the referendum, as well as measures of consumer confidence which have remained fairly upbeat after a dip in the immediate post-referendum period.
The impact of sterling’s fall is yet to be fully felt
The pound fell by 4% against its major trading partners in October, taking its post-referendum decline to 15%. Compared with a year ago sterling is down by 20%.
The fall in sterling is starting to be felt in producer input prices – the prices of materials and fuels bought by UK manufacturers for processing. They have been rising in recent months and were 7.2% higher in September 2016 than a year ago. 6.5 percentage points of that increase was due to imported goods and crude oil.
While consumer prices, on the CPI measure, were 1.0% higher in September 2016 than a year ago (up from 0.6% in August), the ONS believes that there has been little impact so far from sterling’s fall.
Economists do, however, anticipate that rising import costs will result in higher consumer inflation heading into 2017. This is expected to reduce the purchasing power of consumers, leading to their spending being reined in and, in turn, overall economic growth slowing.
Points of interest
Other events of the past month include:
- Bank of England Governor Mark Carney announced he will be staying in his post until June 2019, one year longer than he originally intended (though less than the full eight-year term).
- Nissan announced it will make two new car models at its Sunderland plant, providing a boost to the industry in the wake of the vote to leave the EU.
The Chancellor will present his first “fiscal event”, the Autumn Statement, to the House on Wednesday 23 November. This will be based on the Office for Budget Responsibility’s first set of economic forecasts following the referendum. The Library will publish a background briefing to the Autumn Statement, providing analysis of the economic and fiscal situation.
This article was originally published in the November 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.