Service sector powers UK economy to post-referendum GDP growth

Added 27th October 2016

The UK economy beat Q3 growth expectations with a reported 0.5% rise in GDP, with the services sector acting as ballast to other major industry sector declines.

Service sector powers UK economy to post-referendum GDP growth

Following a Q2 growth figure of 0.7%, consensus forecasts indicated the third quarter would fall to 0.3%, suggesting Brexit-related fears may have been overplayed.

While she concedes the EU referendum would still have an impact, Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “The Brexit bogeyman hasn’t yet been as scary as initially feared.  

“Any lingering concerns over an immediate collapse in growth in 2016 have been officially put to bed, with output continuing to grow in the first major assessment of domestic activity post-referendum.

“Supportive monetary policy has played a part, while the softer pound has kept factory orders ticking along. These, along with robust consumption, will be key levers of growth.”

Nick Dixon, investment director at Aegon, agreed the UK had weathered Brexit better than expected, adding the next focus would be whether higher exports could counter nervous business confidence and muted levels of investment. 

With services the only sector reporting growth - of 0.8% - against widespread contraction in construction - declining 1.4%, agriculture, which reported shrinking output by 0.7%, and production, falling 0.4%, global online trading platform IG said the UK was in a “precarious” position because of its over-reliance on services.

Joshua Mahony, market analyst, said: “Unfortunately it is the services sector - accounting for almost 80% of UK GDP - which is expected to suffer most from Brexit, putting future UK growth in a precarious position.”

But Ben Brettell, senior economist at Hargreaves Lansdown, said he was unconcerned.

“Some will be concerned about the absence of any rebalancing of the economy away from the ever-dominant services sector, which grew 0.8% while everything else contracted. However, I don’t see this as a problem,” he said.

“In an increasingly global economy, individual countries need to specialise in industries where they have a comparative advantage. It’s clear to even the most casual onlooker that the UK has a comparative advantage in services, and therefore it shouldn’t come as a surprise that ever more resources are allocated to that sector of the economy.”

He added that while initial GDP estimates are only based on partial data and should therefore “be taken with a pinch of salt”, it was hard to interpret today’s figures as “anything other than very good news for the UK economy.”

Meanwhile Fidelity International’s global economist, Anna Stupnytska, said with lower real income growth against higher inflation and a softer labour market as result of the weaker pound, the UK still might avoid recession next year.

She added: “Fiscal stimulus in the form of infrastructure investment and some measures to boost consumer spending and business investment, perhaps involving tax cuts, would also go some way towards limiting the Brexit fallout in the short-to-medium term.”

The latest from the Office for National Statistics (ONS) diminished the likelihood of a rate cut next month, according to Brettell, who pointed out the Bank of England’s Monetary Policy Committee only indicated a November rate rise when it was expecting 0% GDP growth.

Dixon agreed: “In addition with inflation already on the turn, we believe interest rates will start to rise in the first half of 2017 and accelerate more quickly than market expectations.”

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