Economic Views

UK economy ends 2016 on a strong footing

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

See all articles

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.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.