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The growing UK economy isn't as strong as it looks

There are worrying imbalances within the UK economy and its relative under-performance globally


ONE year before the UK is to split from the European Union, the economy has avoided the disaster scenarios predicted after the Brexit vote. Don't get too excited.

True, output has risen every quarter since the Brexit vote, expanding 1.8 per cent in 2017. That far outstrips pessimistic estimates from the UK Treasury and others made in the immediate aftermath of the referendum.

There's more good news too: Unemployment is near its lowest since the 1970s, inflation is dropping and Bloomberg's Brexit Barometer, which tracks 22 UK indicators, is at its highest in 17 months.

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The risk is that better-than-anticipated results could distract from imbalances within the UK economy as well as its relative under-performance in a international context.

The UK's resilience over the past 18 months, especially in relation to the labour market, has been extremely welcome.

But scratching beneath the surface there are questions about how long it will last - households cannot dis-save indefinitely and at some point global growth will moderate.

"Productivity growth has failed to re-emerge meaningfully over the past decade and, until it does, the economy will go nowhere fast" said Dan Hanson, Bloomberg Economics. In fact, the nation's stronger-than-expected expansion was close to the bottom of the G-7 charts last year. In the neighbouring euro region, growth was the best in a decade and it surpassed forecasts far more than the UK did.

The US also saw a year of solid performance, with expectations that President Donald Trump's tax cuts may support expansion further this year. The IMF said in January that the global recovery was the broadest in seven years, with faster growth in 120 countries accounting for three-quarters of world output.

That hints at the argument, used by the National Institute of Economic and Social Research and others, that the boom on the continent and in the rest of the world has come to the aid of the UK just as Britain decided to go it alone.

It estimates the buoyant world economy added about 0.6 percentage point to 2017 UK GDP.

Domestic demand also gave a helping hand last year, even with the pressure on consumer spending from faster inflation. Despite a slowdown in growth, it was still stronger than anticipated as the solid labour market gave households the confidence to borrow more and save less.

But that's raised concerns about sustainability and too much debt piling up, which increases vulnerability to interest rate hikes or a turnaround in the 4.3 per cent unemployment rate. The UK Financial Conduct Authority warned this week that even a gradual increase in interest rates "could have a detrimental impact on consumers who carry high levels of debt".

Investment, meanwhile, is hampered by uncertainty over Brexit. The Bank of England estimates that business investment is four percentage points below what it would have been had Britain not voted to leave the European Union.  Data released on Wednesday showed manufacturing shrank in February.

BOE Governor Mark Carney told lawmakers in January that given the health of the world economy, easy financial conditions and strong balance sheets, investment is far below where it should be.

Still, he noted that could change if businesses got more certainty over Brexit, something which came in the form of a transition deal struck on March 19.

A Deloitte survey this week showed the accord boosted business optimism, with weak growth now supplanting Brexit as the top risk.

This good news-bad news take on the UK economy is also evident in Bloomberg's Brexit Barometer. The gauge stood at 34.5 at the end of March, above where it was the day before the Brexit vote and the day Article 50 was invoked.

While this illustrates an overall robust economy, the intervening months have been a roller-coaster ride, with the barometer as likely to fall as to rise.

Unpacking its component parts shows that the employment situation is better and uncertainty is at a post-referendum low, but inflation remains a drag and economic activity is at the weakest since November 2016. BLOOMBERG