UK economy held back by inflation squeeze, Brexit wariness

[LONDON] A picture of inflation-squeezed consumers and Brexit-wary companies emerged in the UK's latest overview of its economy.

Annual growth in the third quarter slowed to 1.7 per cent, slightly higher than previously estimated but still the weakest pace in 4 1/2 years, the Office for National Statistics said on Friday. The economy expanded an unrevised 0.4 per cent from the second quarter, well below the rates seen before the European Union referendum 18 months ago.

Separate figures showed the dominant services industry, which provided almost all of the economy's growth in the third quarter, rose 0.2 per cent in October. Taken together with a mildly positive manufacturing performance in the month, it suggests the economy has been steady this quarter as the Bank of England raised interest rates for the first time in a decade last month.

Bloomberg Economics estimates the economy will maintain its pace this quarter, expanding 0.4 per cent. But it says there's no reason for the central bank to rush though with more tightening.

"Similar gains are likely over 2018 but they won't be fast enough to put a rocket under the dormant wage growth figures," said BE's Dan Hanson. "Headline inflation falling back, together with weak underlying cost pressure, should stay the BOE's hand next year." The economy, which lost momentum in 2017, will probably expand 1.5 per cent this year and 1.4 per cent in 2018, according to a Bloomberg survey. That would be well behind the rates expected for both the US and euro area.

The news on growth highlights the twin pressures facing the UK, both of them relating to Brexit.

Disposable incomes rose just 0.2 percent from a year earlier after adjusting for inflation, which has been driven higher by the fall in sterling since the vote to leave the EU. Consumer spending climbed 1 per cent, the least in 5 1/2 years.

The ONS also said that households have paid out more money than they received for four consecutive quarters, the first time that's happened since records began in 1987.

Companies, meanwhile, remain reluctant to spend until there is greater clarity about life outside the EU. Business investment increased an annual 1.7 per cent, the worst reading for more than a year.

The figures come days after the International Monetary Fund predicted the economy will slow next year and urged the government to reach an Brexit transition deal with the EU as early as possible.

The current-account deficit narrowed in the three months through September, which may ease concerns about the sustainability of the balance of payments.

Households saved less of their income in the period, but a saving ratio of 5.2 per cent indicates Britons have enough in reserve to maintain their spending without going further into debt.

Revisions to exports and imports in the third quarter mean net trade was a neutral influence on the economy in the quarter. It was previously estimated to have acted as a drag.

The latest GDP estimates contained widespread revisions due to a reassessment of output during 2016.

BLOOMBERG