UK economy ends 2016 on a strong footing

Fourth quarter GDP growth beats expectations and shows no signs of Brexit gloom.

26 January 2017

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

There are still no signs of a slowdown in the UK economy since the Brexit referendum, according to the latest GDP figures from the Office for National Statistics. The UK economy is estimated to have grown by 0.6% in the final quarter of the year compared to the previous quarter, where growth was 0.5%.

The latest figures beat consensus expectations of 0.5%, largely thanks to stronger activity from the service sector, which grew by 0.8% during the quarter. In contrast, industrial production output (including manufacturing) was stagnant, while the construction sector eked out 0.1% growth.

We also now have the full-year figures for GDP, which show that the UK economy grew at a steady pace, but slower than in past years. GDP grew by 2% over 2016, which is down on 2015 (2.2%) and 2014 (3.1%).

Consumer demand is driving growth

Strong consumer demand appears to have continued to fuel the good run of growth within services. Activity in the distribution, hotels and restaurants sectors grew by 1.7% over the quarter – the fastest pace of growth since 2012.

Indeed, household consumption is again expected to be the main driver of the expenditure measure of GDP once it is released next month.

Inflation to dent household spending power

However, with inflation rising sharply in the coming months due to higher energy prices, and also higher imported goods’ prices caused by the depreciation in sterling, households are likely to see their purchasing power decline.

Without stronger wage growth, households are likely to cut back spending, especially on non-essential goods and services. Therefore, we continue to forecast a slowdown in UK economic growth over the course of 2017.

However, the latest figures place the economy on a stronger footing to be able to cope with the headwinds that are coming.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.