Economic update: Brexit, growth and prices

January 2017 provided more evidence of the UK’s steady economic growth in 2016 (seemingly unaffected by the EU referendum result), the continued weakness of the pound and rising prices. Is there anything missing? Oh yes, Brexit………a speech, a court case, a Bill, a vote in parliament, and a White Paper.

Brexit gets going

Just in case you have been living under a rock for the last few weeks: January saw the wheels on the Brexit juggernaut begin to roll. The Prime Minister gave a speech setting out the Government’s objectives for negotiations, which were later built into a White Paper. The Supreme Court ruled that the Government would need an Act of Parliament to trigger Article 50. The process of getting the required Act began when the European Union (Notification of Withdrawal) Bill passed its first vote in the House of Commons.

The White Paper ruled out continued membership of the EU Single Market. Instead the UK will pursue a free trade agreement with the EU, which would involve “the freest possible trade in goods and services”. On the customs union, the Government wants the UK to be able to negotiate its own trade deals. This would mean leaving the EU’s common external tariff. However, “a customs agreement” with the EU will be sought. Leaving the customs union will mean rules of origin checks are likely to be reintroduced for goods entering the EU from the UK.  These checks come with a financial and time cost.

2016: a year of consistent economic growth

Getting back to the economy: in Quarter 4 (October – December) of 2016, the UK economy grew by 0.6% compared with the previous 3 months – the same rate of growth as in the previous two quarters. Strong consumer spending continues to support growth in the services sector, as ONS’ Head of GDP notes:

The initial ONS data show the economy ended 2016 with steady growth of 0.6% for the third consecutive quarter.

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.

The UK economy grew by 2.0% in 2016, similar to growth of 2.2% in 2015.

Economists are feeling better about 2017

The Bank of England now expects the UK’s economy to grow by 2.0% in 2017. In its previous forecast – made in November 2016 – the Bank was predicting growth of 1.4% in 2017. The Banks’s growth forecasts for 2018 and 2019 have also been increased, although in both years growth of less than 2% is expected.

In general, forecasters appear to be feeling relatively more positive about 2017. Among forecasters surveyed by HM Treasury the average growth forecast for 2017 rose to 1.4% in January, compared with an average of 1.2% in December.

But the pound is still weak and prices are rising

Echoing all of our economic updates since the EU referendum, the value of the pound remains lower than it was prior to the referendum result. Measured against a basket of currencies, the pound was 13.1% lower in January 2017 than the same period a year ago. This makes imports more expensive and exports cheaper.

Continuing its recent upward trend, consumer prices – as measured by the Consumer Price Index – were up 1.6% in December 2016 compared with a year ago. Economists expect inflation to rise further in coming months, as higher import prices push up costs for producers who, in turn, may pass some of this on to consumers.

Confidence indicators for both the manufacturing and services sectors were positive in January. However, rising costs are putting pressure on firms in both sectors, suggesting consumer prices will rise further in the coming months.

Government borrowing less than previously thought

The ONS provided the government with positive news when it lowered its estimate of government borrowing thus far in 2016/17. Commentators have suggested that this puts government borrowing on course to be below the Office for Budget Responsibility’s (OBR’s) November 2016 forecast. The OBR, however, caution that the final three months of the financial year are the biggest for receipts, and the biggest sources of forecast uncertainty.

This article was originally published in the February edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.

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