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.

Recession unlikely

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.

Imbalanced economy

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.

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