Services sector drives faster-than-expected expansion of economy in the third quarter, but uncertainty over Brexit deal still affecting long-term outlook
Ruth Gregory, UK economist at the consultancy Capital Economics, said the latest figures “have probably sealed the deal on an interest rate hike next week”.
Taken together with the levels of growth recorded in the first half of the year, the latest official figures point to the weakest expansion for the UK economy since 2009. Over the past 12 months, GDP grew at a rate of 1.5%, which is below the rate of expansion recorded in the 12 months to the end of 2016.
It also places Britain behind other major nations including the US, which is expected to report growth at an annualised rate of 2.5% in the third quarter when official figures are released on Friday.
Italy, France and Germany are also expected to grow faster next year, as Brexit uncertainties weigh on consumer confidence and deter business investment, according to the Organisation for Economic Cooperation and Development.
Still, with growth beating expectations and failing to show a deterioration on the previous three months, the latest figures should bolster the Bank to act. The pound gained almost 1% against the dollar to $1.3254 following the release of the figures, indicating that City traders expect a rate increase.
Britain’s dominant services sector, which accounts for about 80% of the economy’s output, was the driver behind the third-quarter increase, recording growth of 0.4%. Computer programming was the largest contributor to services growth, while there was also a strong performance by motor traders and the retail sector.
Manufacturing returned to growth, recording an expansion of 1%, although did not contribute as much to the economy overall because industrial production is much smaller than the services sector. The construction sector contracted for the second quarter in a row, although statisticians said it remained above its pre-financial crisis peak.
Business groups have been spooked in recent weeks by deadlock in the Brexit talks and insufficient clarity over a transitional deal. This could discourage firms from investing in their businesses or raising workers’ wages, spelling further trouble for the economy.
While the latest GDP figures will likely bring them some comfort, there could still be storm clouds ahead. Despite the robust performance of the retail and motor trade in the official figures, which account for a three-month period that has now passed, a number of companies in these sectors have issued profit warnings for the future.
Howard Archer, chief economic adviser to the EY Item Club, said: “Despite the modest pick-up in growth in the third quarter, the near-term outlook for the UK economy at least still looks challenging.”
The official figures show the economy growing at a slower rate than in 2016, with weaker consumer spending due to higher inflation and sluggish earnings growth for squeezed households. That has led the service sector to record growth of about one- or two-tenths slower this year.
Peter Dixon, economist at Commerzbank, said: “All in all, it appears that the economy is running around 0.5% per year more slowly than prior to the EU referendum.”
The latest figures were seized upon by Labour to criticise the government’s policy on the economy, ahead of the budget next month. John McDonnell, the shadow chancellor, said the figures “confirm the impact that seven wasted years of Tory economic policy have had on working households”.
The chancellor, Philip Hammond, said: “We have a successful and resilient economy which is supporting a record number of people in employment.”