UK economy snapshot: October 2018

A
woman holds a Union flag umbrella in front of the Big Ben clock
tower (R) and the Houses of Parliament in London October 4,
2014.
REUTERS/Luke
MacGregor

• UK economy looks to have bounced back strongly from its
  start of the year slump over the summer.
• The strong data, however, masks the likelihood that the
  economy will revert back to type for the rest of the
  year.
• That’s according to Ruth Gregory, senior UK economist
  at Capital Economics.

The British economy may finally have gotten itself out of the
deep rut it entered at the end of 2017, but it still looks to be
headed for its worst year since the financial crisis in terms of
pure economic growth.

Figures from the Office for National Statistics likely expanded
0.7% in the three months up to August. Having grown at a sluggish
0.2% per quarter in the first half of the year, the ONS’ data
suggested that things finally picked up over the summer.

This was thanks largely in part to an incredibly un-British
streak of hot weather, and
an even more uncharacteristic run by the England football team
during the World Cup. The two events in tandem increased
retail sales, boosted the amount Brits spent in restaurants and
pubs, and in isolation, the weather allowed for greater
productivity in the UK’s construction sector.

After several quarters of worryingly slow growth — which
themselves were impacted by particularly poor weather — it
finally looks, on the surface at least, that the UK economy may
be recovering just in time for Britain to face the economic hit
of leaving the European Union.

Unfortunately for the UK, however, research house Capital
Economics is inclined to believe that the pick up will ultimately
be short lived, and that growth in 2018 will be the lowest since
2010, when Britain was just emerging from the depths of the
financial crisis.

“We doubt that the recent improvement will last, for a few
reasons,” Ruth Gregory, senior UK economist at Capital Economics
said in a note to clients on Friday.

“Overall, we have not changed our view that GDP growth this year
as a whole will come in at 1.3% — the slowest annual rate since
the crisis.”

Gregory lays out three separate reasons to believe that the
summer’s strong growth is destined to simply be a brief positive
in an otherwise negative trend:

1. Much of the big boost in the summer was, as mentioned, down
   to the World Cup and the warm weather. Now both of those crutches
   have been removed, things are likely to go back to their
   pre-summer state. “A number of temporary factors, such as a
   bounce in high-street spending and ‘catch-up’ growth in the
   construction sector, boosted activity and should be reversed,”
   Gregory wrote.
2. The summer’s growth spurt actually masked the fact that the
   “fundamental drivers” of the British economy — those which have
   kept growth so subdued since the referendum — are little changed.
   “Admittedly, Bank of England Chief Economist Andy Haldane
   commented in a speech this week that there are signs of a ‘new
   dawn breaking in pay growth,'” Gregory wrote. “But with inflation
   on the up again, the improvements in households’ spending power
   have been small.”
3. Finally, she says, the uncertainty over Brexit will have an
   even more obvious negative impact on growth as the March 29
   deadline approaches. “Brexit uncertainty — which we estimate has
   knocked 0.5ppts or so off business investment since the
   referendum — will probably get worse before it gets better,” she
   said. “While there is a decent chance that Theresa May will
   clinch a Brexit deal (perhaps next week), we are less optimistic
   about the prospects of it gaining Parliamentary approval.”

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