UK: 4Q GDP provides another positive surprise - ING

James Knightley, Senior Economist at ING, notes that the UK economy grew by 0.6% in the last three months of 2016, leaving full year 2016 growth of 2%.

Key Quotes

“With Brexit negotiations set to get underway we believe 2017 is going to see slower growth of around 1.4%. The BoE is expected to sit on its hands this year despite inflation rising above 3%.”

“The preliminary reading of 4Q16 GDP has come in at 0.6%QoQ/2.2%YoY – slightly faster than the 0.5% consensus forecast- and is the 16th consecutive increase. This means the economy grew 2% for full year 2016, which is a very respectable outcome given the shock of the Brexit referendum outcome at the mid point of the year. The UK’s 2% 2016 figure is almost certainly going to be faster than the full year growth figures for the US, Eurozone and Japan, which will be released in coming days.”

“At this stage we only get the industry breakdown, which showed service sector output rose 0.8%QoQ, manufacturing rising 0.7%, construction was up 0.1% while resource extraction fell 6.9%. We will have to wait another month to get the expenditure breakdown.”

“We doubt that 2017 will put in as good a performance. Brexit uncertainty is already showing signs of leading to business caution with investment and hiring intentions softening despite good activity data. Meanwhile, employment has fallen in both the past two monthly reports. Then there is the sterling-related spike in inflation which will put a squeeze on household spending power and likely lead to softer consumer spending growth. Add it all up and we see growth slowing to 1.4% this year.”

“The Bank of England believes that an interest rate rise is just as probable as an interest rate cut and we agree. While inflation is likely to rise above 3% in the second half of the year, the BoE is likely to “look through” this given longer term price expectations are anchored and the growth risks are skewed to the downside due to Brexit. We expect Bank Rate to be left at 0.25% through this year.”