UK Brexit boom sees economy plagued by ‘old concerns’

Bloomberg

The UK economy is maintaining its stellar performance since the Brexit vote, but the reasons may be cause for concern.
Growth beat expectations again in the fourth quarter, coming in at 0.6 percent, but the make-up of the performance hints at ongoing weak links. The expansion is still being almost entirely driven by services and consumer spending, continuing a trend of lopsided growth in seen in recent years.
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 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.
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 growth meant the economy expanded 2 percent in 2016, though that’s down from 2.2 percent the previous year and marked the weakest since 2013. Economists forecast a further slowdown this year, to 1.2 percent.
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 UK 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.
Fourth-quarter GDP, based on
44 percent of the data that will
ultimately be available, showed that industrial production was unchanged following a fall in the third quarter. Construction output rose just 0.1 percent.

BREXIT TALKS
Prime Minister Theresa May plans to start formal talks on leaving the EU by the end of March. She has indicated that she wants to withdraw from the bloc’s single market for goods and services, an outcome that economists say will hurt trade.
Carney was among the economists who warned before the referendum that the UK 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.
On an annualized basis, the UK economy grew 2.4 percent in the fourth quarter. The US is forecast to have expanded 2.2 percent in the period, down from 3.5 percent in the three months through September.
While the economy has been expanding, so too so has the population, in part due to immigration. So even though the economy as a whole returned to its pre-recession size in 2013, Britain remained poorer on a per capita basis until the end of 2015. GDP grew 2 percent last year whereas output per head rose just 1.3 percent, Thursday’s figures show.