U.K. Economy's Best Quarter in Two Years Hides Loss of Momentum

(Bloomberg) -- Britain posted its fastest calendar quarter of economic growth in almost two years, but a sudden loss of momentum from August pointed to a slower pace of expansion in the run-up to Brexit.

Gross domestic product increased 0.6 percent in the third quarter from the previous three months, the most since the end of 2016, the Office for National Statistics said Friday. The figure was in line with forecasts.

U.K. Economy's Best Quarter in Two Years Hides Loss of Momentum

The pickup, from 0.4 percent growth between April and June, was partly driven by household spending, suggesting a record heatwave and the soccer World Cup in the early part of the quarter played a key role. Net trade also made a significant contribution.

With the Bank of England judging the economy is now operating at full capacity, policy makers are expected to raise interest rates at a gradual pace to keep inflation in check. Traders see the next increase toward the end of next year.

But the need for caution was underscored by monthly figures showing the economy stagnated in both August and September, with the dominant services industry posting a modest contraction. The weakness in September partly reflected slower retail sales and fewer car purchases.

“The economy saw a strong summer, although longer-term economic growth remained subdued,” said Rob Kent-Smith, the ONS’s head of national accounts.

The pound was little changed following the data at $1.3017, down 0.4 percent on the day.

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“We think the surge in output will be fleeting. Still, the gain has probably lifted output above the level we estimate is consistent with stable inflation. Assuming the U.K and EU reach a Brexit deal, the margin of excess demand in the economy is likely to widen next year. We expect the Bank of England to respond by lifting rates twice.”

--Dan Hanson/Jamie Murray, Bloomberg Economics. Read the full REACT

The loss of momentum chimes with the latest purchasing- management surveys, which pointed to a sharp deceleration in the final quarter amid weak real wage growth and uncertainty over Britain’s looming exit from the European Union. The BOE last week predicted growth will slow to 0.3 percent in the fourth quarter.

In a sign that companies are delaying spending decisions ahead of Brexit, business investment fell for a third consecutive quarter between July and September and by the most in 2 1/2 years.

Theresa May is striving to unite her warring Cabinet behind a Brexit deal. However, the most contentious issue -- how to keep goods flowing freely across the Irish border -- is far from being resolved and the prime minister will still need to get any agreement through Parliament, where she faces considerable opposition.

U.K. Economy's Best Quarter in Two Years Hides Loss of Momentum

While the economy has rebounded since its snow-blighted start to the year, Britain remains on course to be a laggard among Group of Seven rich nations for a second year in 2018.

Its growth rate has slipped from top of the G-7 rankings prior to the 2016 Brexit referendum to vying with the Italy and Japan at the bottom, with the International Monetary Fund predicting growth of just 1.4 percent this year and 1.5 percent in 2019.

Separate trade figures Friday showed the deficit in goods narrowed to a seven-month low of 9.7 billion pounds ($12.6 billion) in September. A smaller shortfall over the third quarter was partly due to lower imports of vehicles as shipments were disrupted by new EU emission standards.

Here are the other highlights from the report:

  • Consumer spending rose 0.5 percent in the third quarter; business investment falls 1.2 percent
  • Net trade contributes 0.8 percentage point to growth, most since end of 2016, as deficit in goods and services narrows sharply. Services, the largest part of economy, increase output by 0.4 percent; construction gains 2.1 percent; manufacturing up 0.6 percent
  • In September, services fell 0.1 percent; construction grows 1.7 percent
  • Manufacturing rises 0.2 percent on month, but performance is mixed across sectors with car output falling; weaker oil and utility output leaves overall industrial production unchanged
  • GDP rises 1.5 percent in third quarter from year earlier, around the BOE’s “speed limit”
  • GDP per head rises 0.5 percent on quarter, up 0.8 percent on year

©2018 Bloomberg L.P.