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12/22/2017 11:37:29

UK GDP growth of 0.4% in third quarter funded as households reduce savings

(ShareCast News) - UK national growth was confirmed as remaining lacklustre in the third quarter, though a large upward revision in the impact of exports meant the contribution from consumers was smaller than originally thought.
Gross domestic product grew 0.4% in the third quarter compared to the second, the Office of National Statistics said in its third revision of the data, as had been expected.

Thanks to a better starting point in 2017, annual growth was revised up to 1.7% from 1.5%.

For the first time, ONS used value added tax receipts from hundreds of thousands of small and medium-sized businesses to help calculate GDP more accurately.

Growth in household consumption was revised down to 0.5% from 0.6%, following growth of 0.2% in the second quarter, outpacing households' real disposable incomes growth of just 0.2% quarter-on-quarter, meaning it was funded mostly by reducing the saving rate to 5.2% from 5.6%.

The GDP outcome was balanced by a large upward revision to export volumes growth to 0.8%. Net trade was estimated to have had a neutral effect on quarter-on-quarter GDP growth, having previously subtracted 0.5 percentage points.

The UK's current account deficit narrowed to £22.8bn from £25.8bn, meaning it was reduced to 4.5% as a share of GDP from 5.1%.

ONS also revealed that UK total business investment rose 0.5% in the third quarter compared to the second, more than the 0.2% that was originally estimated.

INDEX OF SERVICES AND Q4 OUTLOOK

An index of the UK's key services sector showed a slight rise of 0.2% for October compared to the preceding month, though this was up from 0.1% in September and better than the 0.1% the market had forecast. On a three-month basis the index climbed just 0.3%, as expected, after the previous 0.4% gain.

That could indicate that quarter-on-quarter GDP growth is on track to have slowed in the fourth quarter to 0.3%, some economists suggested.

While October's output rose, September was revised to flat, from growth of 0.1% previously.

"As a result, the risks to the MPC's forecast that GDP will rise by 0.4% again in Q4 remain skewed to the downside," said Pantheon Macroeconomics.

However, the 0.3% quarterly growth indicated to Capital Economics that the economy is likely to have maintained its 0.4% pace in the final quarter of the year, with soft purchasing managers' survey data from IHS Markit even pointing to growth of around 0.4-0.5%.

If the fourth quarter delivers 0.4% growth this should confirm UK GDP growth for 2017 as a whole at about 1.8%.

MORE BALANCED

Where economists did agree, was that the third revision showed elements of GDP were more balanced.

Howard Archer, chief economic advisor to the EY ITEM Club, said the component mix of GDP in the third quarter looks more favourable as the economy was confirmed to have picked up a little speed in the third quarter, but he said it was "still no more than in the middle lane" of growth compared to Europe and other G7 countries.

Taking a more positive festive tone, the UK's performance in 2017 has been rather better than the gloomy talk would suggest, argued Ian Stewart, chief economist at Deloitte.

"Growth has come in stronger than expected a year ago and the pace of activity has edged up since July. A year ago the near-universal view was that unemployment would rise in 2017; instead it has fallen by 150,000 and the jobless rate is at a 42 year low," Stewart said.

"A whopping sterling devaluation certainly has squeezed spending power and incomes, just as you'd expect, but it's also helped reboot manufacturing output. Overall, growth has slowed modestly, not collapsed. Talk of an end to UK growth has been somewhat exaggerated."

Looking ahead, the consensus forecast is for GDP growth to slow to 1.4% next year.

Or it could be much stronger, said Capital Economics' Paul Hollingsworth. "With the squeeze on households' real earnings set to abate, and a chance that Brexit uncertainty actually recedes, rather than build further, as negotiations progress, we suspect that the economy will actually gain a little momentum next year, and forecast growth of 2.2% in 2018".

CURRENT ACCOUNT AND STERLING RISK

Looking at the large current account deficit, Pantheon's Samuel Tombs said this indicated sterling remains vulnerable to a fall again if overseas investors lose their faith in Britain.

"The narrowing of the overall deficit has been driven by a decline in the trade deficit to 1.2% of GDP in Q3, from an average of 1.8% in the four quarters before the Brexit vote. The investment income deficit also has declined, to 2.2% of GDP in Q3, from 2.9%, over the same period. The deficit in current transfers, meanwhile, has remained broadly steady at slightly more than 1% of GDP."

Since overseas investors can liquidate their portfolio investments and bank deposits at a faster rate than direct investments, Tombs noted that sterling is particularly vulnerable to a souring of overseas investors' attitudes.

"Thankfully, the near-term risk of an outward rush of foreign capital has decreased following the recent progress in Brexit talks. But the government still is entertaining the possibility of a hard Brexit, based loosely on the Canada model which would mean that services firms lost access to the single market and net migration-required to keep the economy growing at a steady rate-would decline. As a result, the risk of a further sharp fall in the pound, driven by a reduction in the willingness of overseas' investors to buy UK assets, remains on the table."

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