By Gavin Lumsden of Citywire
The UK economy has cleared the Brexit hurdle with ease, with higher-than-expected growth of 0.5% in the third quarter, according to the first official estimate.
The increase announced by the Office for National Statistics beat economists’ forecast of 0.3%, according to a Reuters poll, but was down from unusually strong growth of 0.7% in the second quarter which still puzzles experts.
Strong contributions from the mining, transport, hotels and services sectors pushed the annual rate of GDP growth to 2.3%, its highest level in over a year, said the ONS.
‘There is little evidence of a pronounced effect in the immediate aftermath of the vote,’ said ONS chief economist Joe Grice.
Rate cut unnecessary
‘Forget any idea about a rate cut next week,’ quipped Marc Ostwald, strategist at ADM Investor Services International, anticipating the influence the data will have on the Bank of England’s forthcoming monetary policy committee meeting.
The Bank’s quick response in cutting interest rates to a new all-time low of 0.25% in August is credited by some as helping the economy through a sticky patch caused by the shock referendum result, which sent the pound plunging 20% against the dollar.
The third quarter growth confirmed the picture presented by lead indicators such as the purchasing mangers’ indices (PMI), said Russ Mould, investment director at AJ Bell. These bounced strongly following an initial fall after the referendum result on 24 June.
Ben Brettell, senior economist at Hargreaves Lansdown, said initial GDP estimates had to be taken with a pinch of salt as they were based on less than half of the available data and were likely to be revised by the ONS in future.
‘Nevertheless it’s difficult to interpret today’s figures as anything other than very good news for the UK economy,’ he said.
Paul Sirani, chief market analyst at Xtrade, agreed, saying the buoyant figures and the prospect of increased consumer spending over Christmas would boost the economy, though he cautioned the dip in GDP still suggested a slowdown.
‘We may need to batten down the hatches for 2017 if rising inflation and a weakening pound turn out to be the principle presents in Santa’s sack,’ he said.
Chris Hare of Investec Economics only expected a mild slowdown in GDP growth if fears of a ‘hard Brexit’ weighed on future investment decisions by businesses. ‘And recent falls in the pound, while providing a fillip to exporters, will begin to squeeze household real incomes in coming months,’ he said.
‘But we do think that the chance of a post-referendum recession is looking increasingly remote,’ Hare added.
Kathleen Brooks, research director at broker City Index, was concerned that the economy was still extremely reliant on services and particularly tourism, which has been boosted by foreign tourists taking advantage of the cheap pound.
‘The bad news comes from the manufacturing sector, which has seen growth contract sharply, even though the weaker pound has fallen to a multi-decade low.
‘This suggests that the expected boost to exports as a result of a weaker pound may not materialise, as higher producer costs, largely caused by higher prices for imports of raw materials and energy, are severely restricting growth prospects for this sector,’ Brooks said.
Hetal Mehta, senior European economist at Legal & General Investment Management, shared her scepticism: ‘On a longer term basis, it is still far from clear that the UK can sustain the current pace of growth.
‘The performance of the economy will depend on a number of factors, including the government’s fiscal policy and nature of Brexit negotiations,’ she said.
Pound and FTSE weak
On currency markets the pound dipped to $1.2245 against the dollar but firmed to 89.19 cents against the euro.
On the stock market the FTSE 100 slipped 20 points or 0.3% to 6,954 despite Barclays cheering the financials sector, leading blue chip gainers with a 2.7% rise to 186.7p.
The bank reported a good performance from its core business in the third quarter, lifting rival Lloyds 1.1% after its shares fell in response to its Q3 statement yesterday.
Again the mid cap FTSE 250 index fared worse, falling 91 points or 0.5% to 17,577.
Amec Foster Wheeler plunged 19% or £1.12 to 473p after the oilfield services group said it needed more time to complete a strategic review and warned that its oil and gas revenues would suffer a further decline next year.
Berendsen also dived 18% or £2.30 to £10.01 after the commercial laundry company warned unexpected costs in its hospitality and workwear businesses would hit full-year profits.
Past performance is not a guide to current or future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Investors in this Fund should understand that capital growth is not a priority and values may fluctuate and the level of income may vary from time to time and is not guaranteed. Where some or all of the fund’s charges are taken from capital rather than income, this will increase yield but decrease the potential for capital growth. Smaller company investments are often associated with greater investment risk than those of larger company shares. Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events.
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.
© 2016 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. RSM-5346