UK: Resilience persists in early 2017 – Lloyds Bank

According to the analysts at Lloyds Bank trends in UK economic activity continue to look resilient, running counter to a narrative of a post-referendum slowdown.

Key Quotes

“The economy expanded by 0.7% q/q in 2016 Q4 according to the most recent vintage of GDP data, leaving the above-trend pace of growth over the second half of 2016 well ahead of that in 2016 H1. Based on available data for 2017 so far, rapid momentum is likely to have been maintained for now. Although ‘hard’ official data for industrial and construction output saw contractions in January, alongside survey data for the quarter so far a GDP growth gain of 0.7% q/q for 2017 Q1 seems plausible. If realised, that could set up calendar year growth of 2.1% in 2017 as a whole, quicker than the 1.8% recorded for 2016, and ahead of the most recent expectations of the Bank of England and the Office of Budget Responsibility.”

“Such momentum looks to be building on somewhat fragile foundations. With consumer spending providing the dominant impetus to UK growth in recent quarters, the three months to January saw back-to-back declines in retail sales volumes over the key festive period. Even with some rebound expected for February, retail sales momentum has clearly turned negative. Looking ahead, the consumer is set to experience a squeeze on purchasing power as inflation rises, induced by sterling’s post-referendum drop. Meanwhile, with the medium-term political and economic backdrop remaining uncertain, investment also looks unlikely to be a key driver of UK growth. While business investment spending was broadly flat over the course of 2016, rising prices – specifically of capital goods – will act as a further deterrent.”

“Overall, we expect the adverse effects of rising prices to dominate the boost to net exports from the 13% sterling depreciation in effective terms since the referendum, and 19% since the mid-2015 peak. As the resilience of recent growth momentum fades, we expect GDP growth in calendar year 2018 to ease back to 1.3%, below our estimates of trend. The pullback from stronger momentum in 2017 is reinforced by the re-profiling of the fiscal headwind implied by the Chancellor’s 2017 Spring Budget. While the updated fiscal arithmetic left intact the broad thrust of an ongoing fiscal tightening, it set up a modest fiscal boost in FY 2017/18, offset by a commensurately bigger drag in future years.”