The Office for National Statistics (ONS) said that gross domestic product (GDP) rose by 5.5% from April to June, having been revised up from the initial estimation of 4.8%. This means that GDP was 3.3% below where it was in the last quarter of 2019 before the start of the pandemic, against the 4.4% which had been previously estimated.
Household spending was the largest driver of the upward GDP revision, which contributed 4 percentage points of the 5.5% increase as lockdown restrictions eased in the spring, allowing outdoor dining and a return to in-person shopping.
However, although pent-up demand following the early 2021 lockdown saw Brits up their spending, more recent GDP figures suggest a marked slowdown in the growth recovery. According to figures from earlier this month, economic growth eased to 0.1% in July, down from 1.4% in June. Many fear that supply chain problems will continue to add to the slowing recovery.
Deputy national statistician at the ONS, Jonathan Athow, said: “The economy grew more in the second quarter than previously estimated, with the latest data showing health services and the arts performing better than initially thought.
“The revised figures also show households have been saving less in recent years than previously thought. Household saving fell particularly strongly in the latest quarter from the record highs seen during the pandemic, as many people were again able to spend on shopping, eating out and driving their cars.”
According to the Lloyds Business Barometer, confidence increased by six points to 36% in August, while overall economic optimism also climbed 6%, following a slight dip in July. The Lloyds Business Barometer also showed that pay growth expectations reached a three-year high, with over a third of UK businesses expecting rises of at least 2% over the coming 12 months.
Companies expecting a 3%-plus wage growth jumped by five points to 17%, hitting a record level since the bank first asked the question back in 2018. However, the net balance of companies expecting to up their headcount remains at 18%, the same level as last month.
Lloyds’ findings demonstrate that confidence has increased in 9 out of the 12 regions and nations of the UK. The North West was up 26 points to 64%, while the East of England was up 14 points to 39%. Scotland also saw increases in confidence, up 34%, while Wales saw an increase of 19%.
The ONS said gross domestic product (GDP) contracted by 1.6% in the first quarter of the financial year. A decline of 1.5% has been previously estimated. This puts GDP at 8.8% below its pre-pandemic levels at the beginning of the year where initial estimates had been 8.7%. However, the contraction is still substantially lower than the 20% drop which was seen during the UK’s first lockdown in spring 2020.
Monthly figures also demonstrate an impressive recovery. In February and March, GDP bounced back despite the UK’s third lockdown still being in place at the time. In April, GDP jumped 2.3% higher. The Bank of England’s outgoing chief economist Andy Haldane commented that the economy was going “gangbusters”.
The most recent data from ONS shows that UK households dramatically cut their spending in the first quarter, putting cash into savings instead. The household saving ratio increased to 19.9% where, in the previous three months, this figure was at 16.1%. The figure is the second highest on record after the 25.9% seen in the second quarter of 2020.
by Ben Brettell, Senior Economist, Hargreaves Lansdown
The UK economy shook off Brexit-related uncertainty to post 0.5% growth in the third quarter. This is down from 0.7% in Q2, but far better than the 0.3% economists had feared.
The ONS said there was little evidence thus far of an output shock in the immediate aftermath of the vote.
Initial GDP estimates should always be taken with a pinch of salt, as they are based on less than half of the data which will ultimately be available, and are therefore subject to revision in the coming months. Nevertheless it’s difficult to interpret today’s figures as anything other than very good news for the UK economy.
Some will be concerned about the absence of any rebalancing of the economy away from the ever-dominant services sector, which grew 0.8% while everything else contracted. However, I don’t see this as a problem. In an increasingly global economy, individual countries need to specialise in industries where they have a comparative advantage. It’s clear to even the most casual onlooker that the UK has a comparative advantage in services, and therefore it shouldn’t come as a surprise that ever more resources are allocated to that sector of the economy.
The Bank of England may deserve some credit for acting swiftly to bolster the economy in the months after the referendum, though of course it’s impossible to predict what would have happened in the absence of any action. What today’s release does do is pour cold water on the chances of a further rate cut next month. In August the Bank said the majority of MPC members expected a further rate cut later this year, but at the time it was forecasting zero GDP growth. A stronger-than-expected Q3 performance is likely to mean the Bank leaves policy unchanged when it meets in November.
By Don Smith
Despite a run of better than expected UK economic data since the Brexit vote – including 0.7% second-quarter expansion, beating estimates – financial markets are increasingly concerned about the outlook for the country’s economy and its currency.
This can be seen most dramatically in sterling’s plunge on the foreign exchanges, which shows little sign of abating. On a trade-weighted basis, the pound declined 15% between the June 23 referendum and October 12, while it has moved from 0.76 to 0.90 versus the euro over the same period.
Some bounce back from this sharp slide appears likely, but there’s little doubt that sterling’s underlying trend remains firmly downwards.
Although the UK economy should steer clear of recession, the anticipated broader effects of Brexit may soon become more evident. As a result, growth is expected to slow next year.
Consequently, the Bank of England (BoE) may cut interest rates further to provide additional support. The next move would likely be a decrease to 0.1% (from 0.25%), but this might not occur until mid-2017.
With interest rates already so low, and an uncertain path ahead for the economy, the BoE will exercise caution when deploying the dwindling number of arrows in its quiver. It will therefore likely attempt to influence interest rate expectations ahead of any actual move, continuing to issue a very dovish message to the markets.
While inflation is expected to keep rising, the BoE will continue to regard this as a short-term phenomenon, which doesn’t challenge the longer-term low-inflation outlook.
At the same time, sterling’s steep fall was largely unexpected. The pound is being driven by psychological forces, technical moves and speculative reasoning, all of which can be especially volatile and therefore very hard to predict.
The significance of the UK’s decision to leave the EU, and very likely the EU single market, is immense. According to leaked Treasury documents, a so-called “hard Brexit” could cost the UK up to €73 billion annually, leading GDP to underperform by as much as 9.5% in the coming 15 years.
It’s worth noting that the economy is highly dependent on trade and that, in contrast to the euro, the pound operates without the protection of a solid current account position. With the potential to fall a further 5-10%, sterling is thus left hugely exposed as we move into a period of major change for the UK’s network of trading relationships.
As far as its impact on the domestic economy is concerned, this is something of a double-edged sword: good for exporters but bad for consumers, whose spending power will likely weaken due to the effect of a short-term burst of higher inflation as import prices increase.
While there may be a backdrop of solid economic data, sterling remains vulnerable due to the current account position of the UK, which runs a deficit of about 7% of GDP – by far the largest in the G20 and, historically, the largest on record.
This deficit reflects, in the simplest terms, the fact that importers have to sell sterling in order to acquire the foreign currency that pays for goods and services sourced overseas.
As a result, a huge amount of sterling flows into foreign currency markets due to the sheer volume of UK imports in relation to exports. This, in turn, makes sterling’s value in the foreign exchange markets heavily reliant on the purchase of UK financial assets by overseas investors, who have to then swallow the loss.
Without these purchases, the value of sterling would fall even further. BoE Governor Mark Carney aptly captured this sense of vulnerability in his pithy comment about sterling relying on the “kindness of strangers.”
Sterling consequently now appears more vulnerable than any other major currency to investor sentiment.
In search of reasons for the pound’s recent plunge, the early October announcement by Prime Minister Theresa May that Article 50 of the Lisbon Treaty would be signed by the end of the first quarter of 2017 surely helped focus investor sentiment on the actual exit event.
Brexit now looks likely to happen no later than the second quarter of 2019 – although, subject to agreement with the rest of the EU, the deadline could conceivably be extended. Given the current rhetoric from key EU politicians, however, there are few signs that the bloc’s attitude to negotiations will soften.
It’s little wonder that markets are increasingly fearful.
Indeed, sterling’s recent plunge may prove just a harbinger. Today, the UK could well be enjoying the relative calm before the real storm that lies ahead.
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Mr. Smith serves as London-based Chief Investment Officer at Brown Shipley, a member of KBL European Private Bankers. The statements and views expressed in this document are those of the author as of the date of this article and are subject to change. This article is also of a general nature and does not constitute legal, accounting, tax or investment advice.
Cruise Lines International Association (CLIA) has published its annual European Economic Contribution Report, revealing that the cruise industry is now worth €3.26 billion (£2.58 billion) per year to the UK economy.
The cruise industry’s direct contribution to the British economy including items such as goods and services purchased by cruise lines and the salaries of their employees, grew by 3.3 percent, making it the highest on record.
The cruise industry’s economic output in Europe reached €40.95 billion (£32.22 billion) in 2015, up 2 percent on the previous year, and an all-time high. The direct expenditures generated by the industry reached €16.89 billion (£13.39 billion), up from €16.6 billion (£13.17 billion) in 2014.
Employment in the UK cruise industry grew by 4.1 percent to 73,919 jobs and accounted for 20 percent of the market share in Europe. An estimated 16,397 of this total were directly employed by cruise lines and earned €605 million (£479 million), the equivalent of 22 percent of the total compensation impacts for Europe. 10,000 new jobs were created across Europe, with 360,571 now employed in cruise and cruise-related businesses. Wages and other benefits for European workers reached €11.05 billion (£8.72 billion).
The port of Southampton has maintained its position as the number one embarkation and disembarkation port in Northern Europe, with a total of 1.75 million passengers passing through in 2015. It was another successful year for British ports overall; in total over one million UK and international passengers visited a British port during a cruise, a figure that has more than doubled in six years.
“The figures released today bear testament to the cruise industry’s contribution to the UK economy. Cruise may have once been considered a travel niche but the multi-billion valuation shows that cruise is a major player within the travel sector” said Andy Harmer, CLIA Europe VP Operations.
He continued: “The success of the global cruise industry is set to continue with 50 ships scheduled for delivery between now and 2019, of which 48 will be constructed in Europe. The ability to maintain continued growth has been the result of decisive investments by cruise operators in innovation and constant improvement. Every year new ships enter into service, offering innovative activities and facilities and 2015 was no exception, with a number of significant developments for the UK cruise market including the naming of P&O Cruises’ Britannia by Her Majesty The Queen; Cruise and Maritime Voyages introducing Magellan and Royal Caribbean’s new ship Anthem of the Seas joining the world wide fleet.’
“The cruise industry continues to make significant contributions to Europe’s economic recovery,” said Pierfrancesco Vago, Chairman of CLIA Europe and Executive Chairman of MSC Cruises. “The impact is clear. More Europeans are choosing a cruise holiday, more cruise passengers are choosing Europe as a destination, and more cruise ships are being built in European shipyards. This translates into great economic benefits for the entire continent, including coastal areas that were hit disproportionately hard by the economic downturn.”
Europe’s economic contribution is a direct result of the impressive growth the cruise industry experienced in 2015 as it reached 23.2 million ocean cruise passengers globally.
