Growth in 2016 was stronger than the OBR and other forecasters were expecting at the start of the year, with little sign of any immediate post-Brexit slowdown. But the OBR predicts growth will slow in 2017 and 2018 as businesses delay investment plans and household incomes start to be squeezed by rising inflation.
The vast majority of economists expect the decision to leave the EU to hit growth in the medium to longer term.
Movements in the bond and currency markets are a barometer of investor expectations about a country’s economic prospects.
Selling bonds through the Debt Management Office is the main way the UK government borrows money to fund the gap between what it spends and the money it receives.
A rise in the premium, or yield, demanded by markets for loaning money means funding the deficit becomes more expensive.
The UK is currently able to borrow money for close to record low costs. Gilt yields remained low despite the Bank of England’s decision to raise interest rates in November 2017, reflecting market scepticism about further rate rises.
Since the vote to leave the EU, sterling has fallen markedly, at times touching 30 year lows against the dollar. While exporters have long complained of being hindered by a strong pound, it does not necessarily follow they will get an immediate boost from a weaker currency, considering the highly uncertain trading environment.
Sterling is also down sharply against the euro. Stronger growth in the eurozone has also boosted the single currency.
The UK’s historic low unemployment rate has been one of the major economic success stories of the past year. Initially led by part-timers and the self-employed, the growth in employment has broadened to include full time employees. But real wages, which had started to recover following the financial crisis, began falling again this year as the depreciation of sterling after the Brexit vote has fed through to consumer prices but nominal wage growth has not picked up.
The number of people in work remains close to record levels. But over the three months to September it dropped for the first time in a year, providing a tentative sign the country’s jobs boom may be losing momentum.
The unemployment rate has tumbled over the past four years from eight per cent in January 2013 to a 40-year low of 4.3 per cent. But the pace of decline has slowed.
After a brief spurt, the rate of average annual pay growth has begun falling due to rising import prices and higher rates of inflation brought on by the fall in the pound after the UK’s EU referendum. But the minimum wage has been increasing faster than average earnings, meaning low paid workers are some of the few to have experienced inflation-bustin pay rises.
A measure of how much economic output is generated for a unit of input, productivity has been the Achilles heel of the UK recovery. For many decades before the financial crisis of 2008-09, it tended to grow at a stable pace of around 2 per cent per year, whether measured by output per worker, output per hour worked or the efficiency of both labour and capital used.
But since the crisis, productivity has failed to pick up, confounding forecasters at the Bank of England and the Office for Budget Responsibility. A brief pick-up in productivity growth in 2016 appears to have been a false dawn.
Since 2007, there has been a huge shift from growth in output underpinned by improved efficiency of the workforce towards all additional growth coming from more workers employed for longer hours.
Despite a number of false dawns, there is no sign of the recovery in productivity growth that is needed for sustainable rises in living standards.
Most other advanced economies have experienced a slowdown in productivity growth since the financial crisis. But this has been more pronounced in the UK than elsewhere.
Exceptionally low inflation, driven largely by falling oil prices, supermarket price wars and the strength of sterling keeping down the costs of imports, was a boon for household finances in 2014 and 2015. But the sharp fall in the value of sterling since the vote to leave the EU means that imports have become more expensive and inflation has risen well above the Bank of England’s 2 per cent target.
Rising import prices have driven inflation to its highest level for five years, though the Bank of England predicts that the annual rate will have peaked in October 2017. It expects inflation to start falling as the effect of the fall in the value of the pound drops from the figures
A lower pound has led to cost increases for manufacturers as well, who must buy their raw materials in international markets. But the rise in costs was passed on much quicker to companies to consumers and the pace of input price increases is now falling.
Big retailers had hedges to allow them to resist passing on the effect of a lower currency to their customers and keep their market share, but they have not been able to fully resist the effects of higher import costs
The Bank of England increased interest rates for the first time in a decade in November 2017. Markets are now speculating on whether it is just “one and done” from the bank or if there are more to come.
The BoE cut interest rates in the aftermath of the vote to leave the EU but that cut was reversed this November as the economy has been stronger than the central bank initially expected. Now the central bank is concerned that domestic inflation pressures may soon increase.
Households in a position to buy property are seeing the benefits of low rates: those who can afford to pay a big deposit are currently able to borrow exceptionally cheaply.
Consumer spending has been one of the driving forces of the UK recovery. But concerns remain about the basis of this spending: if people are using up their savings or taking out loans this could cause future problems.
Retail sales grew strongly in the first six months after the Brexit vote but the pace of annual growth has slowed as consumer prices have risen.
In the aftermath of the vote to leave the EU, consumer confidence dropped sharply but quickly recovered to pre-vote levels. It has recently been drifting down again as progress in the Brexit talks has been limited.
Mortgage approvals remain well below pre-crisis levels.
The services sector is the real powerhouse of the UK economy, accounting for almost 80 per cent of GDP. It is one of the few parts of the economy to have surpassed its pre-recession peak.
Services suffered in the downturn like the rest of the economy but on official measures the sector had regained its previous peak by the end of 2011, well ahead of the rest of the economy. It continues to expand at a healthy rate.
ONS index of services
The closely watched survey of purchasing managers fell sharply in the aftermath of the vote to leave the EU but has since recovered.
Manufacturing has a symbolic place in British economics, despite the fact that its importance has declined consistently over the decades. In 1948, it contributed about 36 per cent of GDP, compared with about 10 per cent today. The number of people employed in the sector has declined even faster than its share of output but new technology has made the sector more productive as it focuses on higher value goods.
Industrial production in the UK is still struggling to recover from the recession, remaining around 7 per cent below its pre-recession size.
ONS index of production
Survey responses suggest UK manufacturers have benefitted from the depreciation of sterling and a pick-up in global growth. However, many UK manufacturers use imported products in their production processes, meaning net exports have not strengthened as much.
The manufacturing PMI, which surveys activity levels, had been on a fairly consistent downward trend before the EU referendum and then fell sharply immediately after the vote. But it has since rebounded, buoyed by a rise in export demand following the depreciation of sterling.
Construction accounts for about 6 per cent of the economy, but was very hard hit by the recession. It contracted by 17 per cent from peak to trough and remains below its pre-downturn peak. After a period of growth, mainly driven by housebuilding, the sector has begun falling again, but the data remains very volatile.
Construction output has slowed so far in 2017. The sector met the definition of technical recession in the third quarter of 2017 as it contracted for two consecutive quarters, however output was still higher than a year ago.
ONS construction output
Having fallen sharply after the Brexit vote, activity rebounded sharply before slowing again as contracts were finished and not replaced by new work.
Another way to ascertain the health of the industry is to look at brick deliveries.
Banks’ lending to businesses started to grow in 2016, having declined since 2011 (when the Bank of England started collecting data). Since the financial crisis the government has introduced many schemes and used much political pressure to encourage banks to improve access to finance for businesses.
Loans to businesses started to grow in 2016 as many businesses paid off post-crisis debts.
Lack of access to credit is particularly acute for small and medium businesses. Despite assurances from the banks that credit is available, many believe that the default answer will be no.
Business investment data has been closely watched since the Brexit vote for any indication that business leaders are jittery about the UK’s economic prospects outside the EU. Investment growth has been sluggish since the vote but not as weak as some had feared.
The UK has a history of credit-led booms, followed by house price crashes: in fact the last time this happened the UK had to nationalise two banks. This means regulators now pay close attention to signs prices may be rising out of control. Since last summer, most markets have cooled but prices are still much higher than a few years ago.
From the summer of 2016, the UK got a new single official house price index. Initial estimates of historic data under the new index suggest that house prices have risen faster than previously thought. Average house prices though have shifted lower as the way the average is calculated has changed to strip out the weight of a small number of high-end properties.
The Royal Institution of Chartered Surveyors’ monthly survey asks its members about expectations for future prices and how many new buyers and sellers are coming to the market. It is a closely-watched forward looking indicator of strength in the housing market.
Public spending cuts have been a central theme since 2010 but the government is still struggling to close the UK’s budget deficit. It has been hampered by continuing weakness in economic growth and tax receipts.
The UK experienced a sharp rise in public borrowing during the financial crisis. Among the G7 large, advanced economies, only the US borrowed more as a share of national income at the height of the crisis than the UK did. But significant cuts to public spending and some tax increases since then have helped reduced public borrowing. In 2017, the UK is predicted by the International Monetary Fund to borrow less than the US, Japan and France, but more than Canada, Italy and Germany.
The accumulated debt burden is still above 80 per cent of GDP – the highest peacetime level this century.
Tax receipts have grown more strongly since April than the Office for Budget Responsibility had expected. However, the fear is that they will grow only slugglishly in future if productivity growth fails to pick-up.
Despite numerous initiatives by successive governments, the UK has been importing more than it exports for a long time. While financial markets have to date been relaxed about the current account deficit, some economists are beginning to worry, saying it could make the UK vulnerable to external shocks.
The UK exports more services than it imports but the reverse is true for goods, which drags down the UK’s net trade position with the rest of the world.
The current account deficit deteriorated sharply in 2016, largely because of a fall in receipts from investments overseas and rises in payments from the UK to foreign investors.
The UK’s balance of payments deficit with the EU widened significantly after 2010. But it has started to narrow as growth in the eurozone has picked up and sterling has devalued against the Euro.