The surprising strength of the UK economy may only be short-lived

Published October 27, 2016 by lagmen
Tourists flocking to the UK because of the weak pound are boosting the economy.

Is that the cheer of Brexiteers I hear? More evidence is mounting that Britain’s vote to quit the European Union hasn’t dealt the country an economic death blow. The Office for National Statistics said today (Oct. 27) that the UK economy grew 0.5% in the third quarter, much better than economists’ forecast of 0.3% growth. This is the first full quarter of data since the referendum in June and follows a strong second quarter when gross domestic product increased 0.7%.

While it’s good news the UK has averted a much-feared recession following the Brexit vote, the breakdown of the data suggest challenges to come. All of the economic growth came from the services sector, which grew 0.8%. Meanwhile, the production, agriculture, and manufacturing sectors shrunk.

Given that the UK hasn’t begun the process of leaving the EU this imbalance of growth might not really matter–services make up 80% of the UK economy. Beyond March 2019—when the UK will probably be outside of the EU—the government wants the economy to be driven more by exports and have a stronger industrial sector. That will be difficult. The drop in manufacturing growth suggests the depreciation of the British pound hasn’t be as beneficial to exports as hoped. As Berenberg Bank’s Kallum Pickering says “the resilient post-referendum performance does not, however, say anything about the UK’s ability to perform outside of the EU.”

The UK economy’s resilience to Brexit may be tested more strongly next year. Most economists have raised their forecast for 2016 growth but still expect a significant slowdown next year. In 2017, the government plans to trigger Article 50, which will begin formal negotiations for what trade deal the UK can get with the EU. The prime minister has already said she won’t give a running commentary and that uncertainty is likely to unsettle businesses. At the same time inflation is forecast to rise faster than wage growth. If consumers feel the pinch, the spending that has boosted the economy so far will wither.

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