Brexit yet to take a bite out of UK GDP

On Thursday 26^th January at 0930 GMT, the Office for National Statistics will release its first estimate of Q4 GDP growth, and growth for the full year of 2016. This release will be even more antipcated than usual for any clues that it may give us about how the UK economy has performed since June’s vote to leave the European Union.

The market is looking for a 0.5% increase in growth last quarter, which is 0.1% less than the Q3 GDP reading. If this were a correct assumption, then it would suggest that the UK economy actually performed better in the 6-months after the Brexit vote, than in the two quarters before it.

So, why hasn’t Brexit had more of an effect on the economy?

Firstly, it takes time for the effects of Brexit to be felt on the consumer, a key driver of UK economic growth. It will take us two years to leave the EU, in that sense, it makes no sense for consumers to change their spending habits based on what may, or may not, happen in the future. Added to that unemployment is low and wages are rising, which is helping to fuel consumer spending, although we did see a blip in December.

But Brexit is impacting some areas of the UK economy, and levels of business investment may fall in Q4, after registering a decline in Q3. Business investment levels can be volatile, especially when looked at on a quarterly basis. But, after rising by 1.24% in the three months leading up to the vote in June, it then fell to 0.4% in the three months to September. If we see further declines, then this would not bode well for the UK economy, and the future for job creation, as it would suggest that businesses are getting cold feet about the future of the UK outside of the EU.

Business Investment already spooked by Brexit

We should remember that the prospect of a ‘Hard Brexit’ only raised its head in October, so there could be an even larger decline in business investment in the final three months of the year. Although this may have no bearing on growth right now, it is likely to impact GDP levels and confidence levels at some point in 2017, so a sharp decline in this figure is worth noting.

Services sector growth is imperative for UK economic prospects

On the bright side, the services sector has performed strongly. The manufacturing and service sector PMIs have risen strongly at the start of the year, and even industrial production jumped sharply in November, suggesting that the weak pound may, finally, start to have an impact on our manufacturing industry.

On balance, there is a chance that the economy may have beaten the consensus estimate for Q4 GDP, since the fate of the economy lies with the services sector, which has been resilient to Brexit concerns. This may give a false hope that Brexit is nothing to be worried about; we disagree. We think that weak confidence levels in the business sector will filter through to weakness in the consumer sector once the government triggers Article 50 in the coming months. Our trade position remains weak, and is a drag on growth, and there is still the prospect of more austerity to come, especially if the government’s tax take declines on the back of financial firms choosing to leave the City. Thus, the immediate growth data may be bright, but the future is a lot murkier.

GBP could become a victim of its own success after GDP

The market impact is likely to be limited to sterling, as stocks focus on record highs in the US. We believe that the pound will focus on the headline figure, so if growth does come in at 0.5% for Q4, or higher, then we could see a bounce in GBP, even if business investment is weaker. GBP/USD is worth watching. The pound has been the best performer vs. the USD in recent days, but if the GDP report pushes this pair to 1.28 then watch out, this is a key resistance zone and could trigger a sell off.