UK Economy: Dark Days Ahead
The new Gross Domestic Product (GDP)—the main indicator of economic growth—figures released on Thursday (27 Oct.) show that the UK economy is doing well. The UK economy grew by 0.5% in the third quarter (July-September). This is the first GDP release to cover the period following the EU referendum.
Hold on, though. While it is much better than many economists have been hoping for, this is only temporary. It shows that nothing has changed much, because nothing has been done, or shall I say, triggered yet. The positive figures might beat immediate fears of a recession, but there are signs that the economy will be facing hardships in future months. The Monetary Policy Committee was expecting to vote for a further interest rate cut next week if the GDP data weren’t in line with their expectations.
The Chancellor, Philip Hammond, is very happy with the news: “The fundamentals of the UK economy are strong, and today’s data show that the economy is resilient,” he said. His upbeat tune though, masks the upcoming possibility of more stimulus measures. With inflation growing and yesterday’s news of a £84bn shortfall in public finances over the period of the next five years, there is turbulence ahead.
The report from the Office for National Statistics (ONS) shows that the Brexit vote didn’t affect the economy, or it’s too early to have an effect yet. The pound has risen a little to $1.225, as the report brought some sunshine to traders. The UK economy is managing to perform well thanks to consumer spending and a strong services sector.
The GDP considers data from the services, production and construction industry sectors—everything we make for money. While construction, agriculture, industrial production and manufacturing sectors shrank, the services sector, which accounts for 80% of the economy, grew by 0.8% in the three months. Transport, storage and communication are the main areas where the services sector performed well. According to the ONS, it was, particularly, film, music and TV that gave the biggest boost to the economy. Summer film releases including Ghostbusters, Jason Bourne, Roald Dahl’s The BFG and Star Trek helped increase box-office receipts in July. As Tom Knowles of The Times put it, “Roald Dahl is saving the economy.”
UK economy in 2017
But many London economists are predicting that things will change by 2017. They say that growth will slow down as firms postpone investment and inflation rises. With higher prices and lower wages consumer spending will take a hit.
Geoffrey Yu, head of UK Investment Office at UBS Wealth Management, says that “Anecdotal evidence supports the view that we’re yet to see any meaningful damage as a result of the Brexit vote, at least in the short-term. Of course, we should not overlook the lingering sense of uncertainty. Though the economy has fared better than initially feared, we expect that economic growth will slow down relative to the early part of this year.”
“Disappointing and sluggish”
Others have chosen to read today’s data as “disappointing and sluggish.” Labour's Shadow Treasury Minister Jonathan Reynolds says that the report shows "the failures of the Tories' economic approach" and that the manufacturing sector is showing “little sign of benefiting" from a weak Sterling.
Kathleen Brooks of City Index says “it isn’t all sunshine and flowers.” The figures, she says, show an “unbalanced economy.” The UK economy relies heavily on the services sector, while the manufacturing sector has contracted. This won’t help the expected increase in exports due to the weak pound. Many others voice similar anxieties, saying that many exporting industries are postponing investment due to Brexit worries.
Nothing to do with Brexit
The figures might not have changed since this morning, but the way different analysts perceive them seems to vary.
A calmer approach is that of James Hughes of GKFX, who says that the growth figures have “nothing to do with the Brexit vote, rather, they are following the trend of growth in the UK that has been in place for 15 previous quarters.” For him, “very little has changed since the referendum.” This is why, things will change when the big decisions will be made. When the UK triggers Article 50 and starts the negotiations with the EU, the economy will definitely be shaken.
So, maybe, before people begin talking about a boost or a bust, we should all keep calm. There’s storm ahead of us and we should tread carefully. Whether we choose to see the economy rising like “a well-mixed Victoria sponge” as some have said, or “disappointing and sluggish”, the truth is we have a long road ahead.
An increase in GDP doesn’t mean that everyone in the country is getting a share of the pie. Some increase spending on credit cards due to loss of jobs or reduced wages. Also, GDP doesn’t measure the unequal distribution of wealth and income. Most importantly, it can’t measure happiness.