UK Economics

Pound on solid ground as data confirms UK economic growth held up in months before EU referendum

  • Relatively upbeat data has lifted the pound in the past couple of weeks
  • Second quarter GDP estimate unrevised at 0.6% 
  • Household spending continued to be the biggest driver of growth in Q2

The pound made further gains today after official figures confirmed that the UK economy was in strong shape in the run-up to the EU referendum.

Solid household and businesses spending in the second quarter meant the Office for National Statistics left its estimate of gross domestic product growth unrevised at 0.6 per cent.

Relatively upbeat data has lifted the pound in the past couple of weeks after big falls following Brexit, although today sterling was up only modestly at $1.32 and €1.17.

Consumer spending: It still is the biggest driver of growth of the UK economy

However, it could lose its gains against the dollar if the US Fed’s chairmain Janet Yellen is seen as supportive of raising interest rates when she holds a meeting this afternoon.

The ONS also left year-on-year GDP growth unchanged at 2.2 per cent.

Joe Grice, ONS chief economist, said the data reinforced the picture that the economy grew strongly in April, but remained flat in May and June.

‘Our survey returns, which include the period leading up to and immediately following the referendum, show no sign so far of uncertainty having significantly affected investment or GDP,’ he added.

Household spending, which has been one of the main drives of the UK economic recovery since the financial crisis and accounts for roughly two-thirds of the economy, continued to be the biggest driver of growth.

It rose 0.9 per cent in the second quarter compared to the previous three month – the fastest rise in the second quarter since before the crash, the ONS said.

Business investment, which had been falling for two consecutive quarters, rose by 0.5 per cent in the three months to the end of June, also contributing to higher output.

This is at odds with recent surveys suggesting a sharp slowdown in investment intentions since the vote to leave the EU, particularly in the service sector.

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Martin Beck, senior economic advisor to the EY ITEM Club, said that the data only reflects the pre-referendum period and that a future slowdown was still likely.

He added: ‘But with a number of recent surveys from the CBI and others showing bouncebacks from post-vote lows, strong official retail sales numbers for July, and the support offered by the package of measure announced by the Bank of England, predictions that the economy will fall into recession look unduly pessimistic.’

ONS data has also showed that the services sector, which accounts for almost four fifths of the UK economy, grew by 0.5 per cent in the second quarter, edging down from 0.6 per cent in the first three months of the year.

British consumers regain some of the confidence they lost after June’s Brexit vote

Consumer confidence has risen at its fastest monthly rate in three-and-a-half years as Brexit jitters ease, a survey has found.

The YouGov/Cebr Consumer Confidence Index has seen its highest monthly bounce since February 2013 of 3.2 points to 109.8.

The poll reveals significant increases in people’s expectations for their household financial situations and property values over the coming year.

Only one measure – job security in the year ahead – has fallen slightly in the last month.

All four measures looking back over the past 30 days have improved – household financial situation, property value, job security and business activity in the workplace.

August’s rise follows July’s sharp fall to the index’s lowest point in three years following the vote to leave the EU.

But despite the strong improvement it has only recovered around half of the ground it lost in the wake of the referendum.

Meanwhile a bounce back in industrial production more than offset continued weakness in the construction sector.

On the negative side, net trade cut 0.3 per cent off GDP reflecting a near-stagnation in export volumes.

John Hawksworth, chief economist at PwC, said that strong consumer spending meant more imports, widening the trade gap.

‘The weakening of the pound since the referendum could help to close this trade gap to some degree, although it will also dampen consumer spending growth by squeezing real incomes as import prices rise,’ he said.

‘We will have to wait until late October for the first official GDP estimates for the third quarter, but today’s data confirms that the UK economy was in reasonable shape going into the referendum vote, while other recent data suggests that the consumer side of the economy held up reasonably well over the summer.’

Many economists had tipped the UK economy to maintain momentum ahead of Britain’s vote to leave the European Union, but they also said the UK would start to see an economic slowdown in the months following Brexit.

However, a most recent slew of data covering the two months after the Brexit vote seems to suggest the British economy is faring better than initially expected.

Retail sales figures by the Confederation of British Industry out yesterday showed a surprise rise in sales volumes in August, helped by warmer weather. This follows above-forecast July retail sales number from the Office for National Statistics last week.

Figures released overnight were also positive, with British consumers looking to have regained some of the confidence they lost after June’s Brexit vote.

However, last month the closely-watched Markit Flash UK Composite Output Index suggested the UK economy had slumped at its fastest rate since the financial crisis in July.

On the rise: Consumer spending rose 0.9% in the second quarter compared to the previous three months

Ian Stewart, chief economist at Deloitte, said there were ‘few signs’ that Brexit had derailed consumer recovery.

‘Household spending accounts for roughly two-thirds of the economy and is growing at the fastest rate in eight years,’ he said.

But Samuel Tombs, chief UK economist for Pantheon Macroeconomics, said consumer growth will be revised down as consumer spending will take a hit when inflation eventually picks up.

‘Looking ahead, consumers might be able to maintain strong growth in their spending for another quarter, but when inflation picks up in earnest early next year and firms follow through on plans to freeze hiring, they will have to slow down,’ he said.

‘Meanwhile, the slight rise in business investment in the second quarter provides little reassurance about the post-referendum outlook, since few businesses anticipated the Leave vote and surveys suggest firms are recoiling from major financial commitments in third quarter,’ Mr Tombs added.

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