Economy set to end 2016 with robust growth when fourth-quarter figures revealed


The UK economy is set to defy expectations of a Brexit-induced slump and cap off 2016 with robust growth when fourth-quarter figures are revealed on Thursday.

Economists believe gross domestic product (GDP) data for October to December will show a resilient performance from the UK economy, slowing slightly to 0.5% from 0.6% in the second and third quarters.

Last month's strong figures from the UK jobs market, coupled with hefty output rises in the latest PMI surveys, has fuelled an optimistic outlook for economic growth in the final months of last year.

Britain's powerhouse services sector, which accounts for around 80% of UK GDP, brushed aside Brexit uncertainty to jump to a 17-month high in December, according to PMI data.

Official GDP figures have also been revised up for the third quarter, casting further doubt over the pessimistic predictions from economists who had forecast a sharp slowdown after the Brexit vote.

However, fourth-quarter growth has the potential to be dragged back by a lacklustre performance from the retail sales in December, which fell at their fastest rate in nearly five years.

Shoppers spending less on clothing, footwear and household goods in the lead up to Christmas caused retail sales to fall 1.9%, compared with a 0.1% drop in November, the Office for National Statistics (ONS) said.

Howard Archer, chief UK and European economist at IHS Markit, said retail sales will continue to be squeezed as consumers grapple with "markedly diminishing purchasing power" as inflation rises.

On economic growth, he added: "Like a slow puncture, we suspect that the economy will gradually lose air as the year proceeds.

"GDP growth is seen easing to 0.4% quarter-on-quarter in the first quarter and then slowing further. However, we do expect the economy to keep growing through the year."

In December, the Bank of England kept interest rates on hold at 0.25% and said cracks were beginning to show in the business sector as firms put investment decisions on hold. 

The Bank has pencilled in economic growth to expand by 0.4% in the fourth quarter in a more gloomy assessment of the economy's performance. 

At the beginning of January, Bank governor Mark Carney told MPs on the Treasury Select Committee that Brexit no longer posed the single biggest risk to financial stability and defended the Bank's assessment of the EU referendum result. 

He said the Bank's risk analysis around Brexit was right and the mitigating steps that it took helped reduce the severity of the risk.

Chief among the Bank's concerns going forward will be the build up of inflation, which jumped to a two-and-a-half year high in December at 1.6% and is expected to surge higher as sterling's slump bumps up prices. 

The Bank predicted in November that CPI will jump close to 3% in 2017, while influential think-tank the National Institute of Economic and Social Research has said it could hit almost 4% this year.

Mr Carney said last week that the Bank will tighten its focus on ballooning household debt as consumers continue to spend in the face of a financial squeeze from rising inflation.

Alan Clarke, Scotiabank's head of European fixed income strategy, said slowing retail sales and rising inflation were the two themes that will dominate the economic agenda this year.