July boost from World Cup and hot weather masks stagnation in following two months

This article is more than 1 year old

This article is more than 1 year old

The UK economy expanded at the fastest pace in two years during the third quarter, but has begun showing signs of a slowdown ahead of Brexit as more business investment decisions are put on hold.

Philip Hammond claims strong growth, but it's mostly froth Read more

In what is likely to be a peak for the economy this year, the latest snapshot from the Office for National Statistics (ONS) showed GDP growth in the three months to the end of September was 0.6% – the fastest expansion since the final quarter of 2016.

But growth has begun to falter as the boost to the economy from the warm weather over the summer and England’s performance at the World Cup has fizzled out.

GDP growth flatlined in August and September, with signs of weakness in business spending, retail sales and a fall in domestic car purchases.

City economists had forecast growth of 0.1% in September, although the UK economy unexpectedly stagnated for the second month in a row, as new car registrations fell by a fifth in the worst September for the motor trade in a decade.

Although there are gathering signs of weakness as the country braces for Brexit on 29 March next year, on an annual basis, the British economy grew by 1.5%.

Philip Hammond, the chancellor, said on a visit to the Fuller’s brewery in London just two weeks after the budget that the growth rate was “proof of the underlying strength in our economy”.

There are however mounting signs of underlying weakness as Theresa May struggles to agree a Brexit deal with the EU, and business investment dropped at the fastest rate since early 2016.

The latest figures reveal a contraction in corporate spending of 1.2% during the third quarter, which was the first time business investment has slipped for three consecutive quarters since the global financial crisis a decade ago.

Azad Zangana, senior European economist at the City fund manager Schroders said concerns over Brexit were among the reasons for businesses delaying investment decisions.

“Although more recently, those delays are turning into cancellations, with almost daily announcements of manufacturing jobs losses and plant closures as firms shift production out of the UK,” he added.

The largest contribution to growth in the third quarter came from the UK’s services sector. Net trade – the difference between imports and exports – contributed 0.8 percentage points to GDP growth, with a 2.7% increase in exports versus stagnant growth in imports.

Construction output continued to accelerate following a weak start to the year, when freezing weather from the “beast from the east” forced cranes and diggers across Britain to fall idle. Quarterly output in manufacturing also rose for the first time in 2018.

With an expansion of 0.6% in the third quarter, the latest GDP figures suggest the UK economy grew three times faster than that of the eurozone, after growth in the single currency bloc dropped to 0.2%, the lowest rate in four years.

However, economists believe UK growth has likely peaked. The Office for Budget Responsibility, the government’s economics watchdog, estimates growth will drop to 1.3% in 2018 from 1.7% last year – which would make 2018 the worst year for the economy since the recession in 2009.

Rob Kent-Smith, the head of national accounts at the ONS, said: “The economy saw a strong summer, although longer term economic growth remained subdued.”

Economists said that much of the acceleration in growth during the third quarter would have come as companies and businesses caught up on purchases and sales they would have made earlier in the year, yet were prevented from doing so by the freezing weather during February and March.

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Samuel Tombs, of the consultancy Pantheon Macroeconomics, said: “Two consecutive months of stagnation in GDP [during August and September] underline that the economy has little momentum and that the strong quarter-on-quarter growth rate simply reflects the weather-related rebound in the summer.”

Strengths and weaknesses in the UK economy

Strength: consumption

Helped along by warmer weather over the summer, household spending grew by a robust 0.5% in the third quarter. The services sector, the largest driver of growth in the economy, grew by 0.4%. However, consumer spending began to slow in August and September.

Strength: labour market

Unemployment is at the lowest levels since the mid-1970s, while average weekly earnings are growing at the fastest pace in almost a decade. Still, households have come under pressure from higher inflation, with real pay yet to return to the peak recorded before the financial crisis.

Weakness: business investment

Brexit-related uncertainty has put the dampeners on business investment, with a decline of 1.2% in the amount invested by companies in the third quarter. This marked the third straight quarterly decline – the first time this has happened since the global financial crisis.

Weakness: car industry

Production of transport equipment fell by 0.2% in the third quarter, in the first such decline since the financial crisis. Economists blamed the decline on weaker levels of car production, amid squeezed household incomes and new emissions tests.



