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Warning signs abound for UK economy following strong fourth quarter

Warning signs abound for UK economy following strong fourth quarter
April 2, 2017
LONDON - The British economy's strong finish to 2016 looks likely to prove a high watermark as Brexit gets underway, according to a range of indicators on Friday which pointed to a growing squeeze on consumers.

Households ran down their savings to a record low as their spending power shrank sharply in the last three months of 2016, official data showed.

In another indication that the world's fifth-biggest economy has lost some of its resilience to last June's shock vote to quit the European Union, the dominant services industry contracted in January for the first time since March last year.

Separately on Friday, a survey showed consumers were worried about the outlook for the economy. And there was a surprise fall in house prices.

Britain's economy last year defied forecasts that it would slow sharply after the referendum decision to leave the EU.

The Office for National Statistics confirmed gross domestic product grew by a quarterly 0.7 percent in the October-December period, as expected in a Reuters poll of economists.

Growth for 2016 as a whole was 1.8 percent, the strongest among all Group of Seven rich nations bar Germany.

But a quick rise in inflation, caused in part by the fall in the value of the pound since the Brexit vote, is expected to crimp spending by consumers, the main drivers of the economy, just as Prime Minister Theresa May begins Britain's EU divorce.

Real household disposable income -- a measure of spending power -- shrank by 0.4 percent in the last three months of 2016, the steepest quarter-on-quarter drop in nearly three years.  

   And while consumer spending remained strong, the savings ratio sank to 3.3 percent, its lowest level since records began in 1963, raising questions about how long households can maintain their spending.

The ONS said the fall in the savings ratio in part reflected changes in pension fund holdings rather than a big shift in the real incomes of households. But economists said the figures were reason for caution.

"For consumption to continue to grow at current levels, the UK needs the savings rate to drop further. Yet today's data show there is not much further to fall," HSBC economist Elizabeth Martins said in a note to clients.


Supermarket chain Asda said its gauge of disposable income showed the weakest growth since June 2014 during February, with the poorest households hit particularly hard.

Companies are also wary. The ONS said business investment fell by 0.9 percent in quarterly and annual terms in the fourth quarter, roughly in line with a previous estimate.

The fall the pound is not all bad news for Britain's economy and Friday's data showed it was helping to ease one of its biggest vulnerabilities -- its wide balance of payments deficit with the rest of the world.

The ONS said the current account deficit more than halved in the fourth quarter to 12.1 billion pounds -- falling by more than expected in the Reuters poll -- and stood at 2.4 percent of GDP, down sharply from 5.3 percent in the third quarter.

"Much better, but sterling still is vulnerable if overseas investors lose confidence," said economist Samuel Tombs of consultancy Pantheon Macroeconomics. He said a "hard Brexit" -- big hurdles for trade between Britain and the EU -- could trigger a fire-sale of British assets by foreign investors.

The deficit had been expected to improve as the fall in the pound increased the value in sterling of British investments held abroad and helped exporters.

Net trade contributed an unusually strong 1.7 percentage points to quarterly economic growth in the fourth quarter.

But economists said this should be seen against a 1.4 percentage point drag in the third quarter, with figures for both periods distorted by trade in "erratic" items like aircraft and gold. -Reuters