Who can forget the "doom and gloom" warnings about the fate of the UK should Brexit win? Well, according to the latest confirmation received on Thursday, they were not only wrong but with an ironic twist because according to the Office for National Statistics, the UK economy grew by 0.6% in the Q4 of 2016, more than the 0.5% consensus estimate, and - more importantly - grew by 2% for all of 2016, making the UK the fastest growing economy among the G7 in the past year.
On an annualized basis, the U.K. economy grew 2.4 percent in the fourth quarter. The U.S. is forecast to have expanded 2.2 percent in the period, down from 3.5 percent in the three months through September.
The fourth-quarter GDP estimate showed that services surged 0.8 percent, adding 0.6 percentage point to GDP and offsetting stagnation in industrial production. Within that, the category that includes restaurant and hotels jumped 1.7 percent, its best performance since 2012. The robust data come as Theresa May prepares to meet US President Donald Trump on Friday. This will be an important step in her mission to build a “truly global Britain” that, she believes, will be able to exploit export markets more fully once freed from the constraints of the EU’s common tariffs and commercial policy.
Chancellor Philip Hammond welcomed the figures, saying “every major sector of the economy grew last year, which is further evidence of the fundamental strength and resilience of the UK economy”. He added that, while “there may be uncertainty ahead as we adjust to a new relationship with Europe”, the UK was “ready to seize the opportunities to create a competitive economy that works for all.”
"Strong consumer spending supported the expansion of the dominant services sector and although manufacturing bounced back from a weaker third quarter, both it and construction remained broadly unchanged over the year as a whole,” said Darren Morgan, head of GDP at the ONS.
Indeed, the growth was driven entirely by services, with zero support from construction and production, in a continuation of the recent trend of a lopsided expansion according to Bloomberg.
As expected, establishment economists embarrassed by their post-Brexit forecasts, quickly attacked the data suggesting the expansion would unlikely continue. Bloomberg with the report:
While the support is welcome, it may prove unsustainable. Households are borrowing with abandon and saving less, and an expected pickup in inflation through this year raises the risk of a squeeze on incomes. Economists forecast a sharp slowdown this year, and Bank of England of England Governor Mark Carney has warned of pressure from inflation and weaker business spending.
“Today’s data was good, but there are pockets of potential unsustainability in household spending that could drive a slowdown,” said Chris Hare, an economist at Investec Securities in London and a former Bank of England official. The “rebalancing” of the economy toward exports, sought by policy makers for years, has so far failed to materialize, he said.
Carney was among the economists who warned before the referendum that the U.K. might have faced a recession if Britons voted Leave. Pro-Brexit campaigners have pointed to the economy’s resilience as evidence that leaving the EU won’t make the country worse off. Carney said last week that consumption-led growth “tends to be both slower and less durable” as it eventually overtakes earnings. Households borrowed at the fastest pace in more than 11 years in November and credit surged from a year earlier.
To be sure, the fairytale growth story - sustained in big part by the plunge in cable - is likely to face a reversal in the coming quarters. Companies from airline EasyJet Plc to telecommunications firm BT Group Plc have this month cited Brexit-linked problems such as a weaker pound and loss of business as they offered investors a forbidding outlook for this year. The U.K. currency has dropped 15 percent since the referendum in June, fueling inflation by driving up import costs.
Auto-industry investment plunged by more than a third last year as carmarkers concerned about Brexit shied away from long-term commitments, the Society of Motor Manufacturers and Traders said on Thursday.
As a result, growth is expected to slow this year as inflation picks up, driven by the depreciation of sterling, squeezing household incomes. “Growth at the end of last year appears to have relied excessively on household spending, which has been increasingly financed by debt,” said Samuel Tombs of Pantheon Macroeconomics.
“GDP growth likely will slow decisively in Q1 as the squeeze on households’ real incomes intensifies.”
That may indeed happen, but For now Brexiteers are enjoying their day in the sun, having been proven right, if only for the time being.