Consumers Buoy U.K. Economy as Brexit Hits Business Investment

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Consumers helped to keep the U.K. economy growing in the fourth quarter as firms cut investment amid the escalating chaos over Brexit.

The Office for National Statistics left its growth estimate at 0.2 percent, a sharp slowdown from an upwardly revised 0.7 percent in the previous three months.

The performance would have been worse but for consumers, who are enjoying record employment and the fastest wage growth for a decade.

Households spent 0.3 percent more, slightly less than the pace of the third quarter but enough to offset the damage from a fourth consecutive fall in business investment. Strong government spending also contributed to growth.

Investment is in its worst slump since the financial crisis - spending is down 2.5 percent from a year earlier - and analysts see no prospect of a recovery so long as the threat of a no-deal departure from the European Union persists. Trade also acted as a drag on growth last quarter as the deficit widened.

Separate figures showed the current-account deficit widened in the fourth quarter to 23.7 billion pounds ($31 billion), or 4.4 percent of GDP. The deterioration came as British investors earned less on their direct holdings abroad.

The U.K. financed the shortfall, the largest since 2016, by cutting equity and debt holdings abroad while foreign investors increased their holdings of U.K. debt securities.

Consumers have been the engine of growth since the 2016 Brexit referendum. Economists had expected them to cut back in the new year in the face of Brexit uncertainty but strong retail sales in January and February suggest they remained resilient.

Stronger Earnings

With earnings growth now outpacing inflation, real disposable income rose by 1 percent in the fourth quarter, the biggest quarterly gain since the second quarter of 2017. It also meant they were able to save more of their incomes than at any time since the end of 2016, providing a buffer to help support the economy.

But the squeeze on living standards since the referendum has come at a cost. Households were borrowers for a record ninth straight quarter between October and December, meaning they continued to spend and invest more than they received.

Only the dominant services industry grew in the fourth quarter. Manufacturing and construction both recorded declines. The indications so far are that the economy also grew by 0.2 percent in the current quarter.

With business investment so weak, the British economy is forecast to expand just 1.3 percent this year, the worst performance since the credit crisis plunged Britain into recession a decade ago.

GDP rose 1.4 percent in the fourth quarter from a year earlier. The annualized rate was 0.9 percent, compared with 2.2 percent in the U.S.

The ONS said there was little evidence of widespread stockpiling to guard against disruptions in the event of a disorderly Brexit. Inventories grew in the fourth quarter but only a few companies said they were hoarding.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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