Growth in 2016 has proved to be 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 both in the short and medium 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. While this will ease pressure on the public finances, it also reflects the market’s expectation that interest rate cuts are on the way for the UK.
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. But because Brexit also creates risks for the single currency zone, the decline has been smaller than against the dollar.
The UK’s rapidly falling 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 has broadened to include full time employees, but the pace of improvement has slowed notably. Real wages, which dropped about 8 per cent since the financial crisis began, are recovering but slowly.
The number of people in work is close to record levels.
The unemployment rate has tumbled over the past two years from eight per cent in January 2013, but the pace of decline has slowed.
After a brief spurt, the rate of average annual pay growth has slowed even though it is still rising faster than inflation to give real pay growth after five years of stagnation and falls.
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, whether measured by output per worker, output per hour worked or the efficiency of both labour and capital used.
Since the crisis, productivity has failed to pick up, confounding forecasters at the Bank of England and the Office for Budget Responsibility.
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.
Economists have debated the cause of stalled productivity growth extensively but with little consensus, save for agreement that it is partly related to weak output in the oil industry and in financial services.
Exceptionally low inflation, driven largely by falling oil prices, supermarket price wars and the strength of sterling keeping down the costs of imports, has been a boon for household finances. But the sharp fall in the value of sterling since the vote to leave the EU means that imports will become more expensive and the Bank of England expects inflation to begin rising.
The UK briefly dipped into deflation in April 2015 for the first time for more than half a century. Economists expect the rate to remain low months yet, before beginning to rise sharply.
Falling oil prices have driven down input costs for manufacturers. But with sterling now much weaker, costs are beginning to rise.
The other big factor pushing down inflation has been falling prices in the shops. Most big retailers have hedged their exposure to sterling, so prices are likely to remain low until next year. But the rapid falls of recent years are unlikely to be repeated.
Before the vote to leave the EU, all the talk was of when the first rise would come. Now the question is how low will rates go?
That said, the BoE faces a tricky task. It needs to balance the desire to support the economy while ensuring that inflation – which is likely to rise following the fall in sterling – remains under control.
The BoE cut interest rates in the aftermath of the vote to leave the EU in an attempt to shore up the economy. Governor Mark Carney has signalled that more monetary policy easing could be needed but they will need to trade off the risks of slowing growth against the risks of rising inflation and a weakening currency.
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 have been growing strongly as the recovery has begun to filter down to household finances, helped by low interest rates and inflation.
In the aftermath of the vote to leave the EU, consumer confidence dropped sharply but quickly recovered to pre-vote 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 9 per cent below its pre-recession size.
ONS index of production
Exports remain the main weak spot for manufacturing, having been hit by the slowdown in the eurozone. Domestic demand remains strong, but the industry as a whole is still smaller that it was before the downturn.
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 been slowing for a number of months, and contracted in the first quarter of 2016.
Having fallen sharply after the Brexit vote, activity rebounded sharply.
Another way to ascertain the health of the industry is to look at brick deliveries.
The government has introduced many schemes and used much political pressure to encourage banks to improve access to finance for businesses. Despite this lending figures from the Bank of England suggest lending declined every month from 2011 (when they started collecting data). But lending has started to grow in 2016.
Loans to all businesses remain subdued. One theory is that businesses have been taking advantage of ultra-low interest rates to pay off debt.
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 .
After growing strongly, business investment has disappointed amidst jitters around the exit from the European Union.
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 is a closely-watched forward looking indicator.
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 tax receipts.
Compared with other leading advanced economies, Britain had the largest deficit bar Japan in the G7 last year. It is projected to overtake the US in 2016, but still borrow more than Italy, Canada, France and Germany.
The accumulated debt burden is still higher than 80 per cent of GDP – the highest peacetime level this century.
Although tax receipts have begun to improve, they remain mediocre considering the strength of the recovery. The concern is that revenues may start to fall as the shock from the Brexit vote depresses economic activity.
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.
While the service sector continues to deliver a healthy return, with exports far exceeding imports, the picture is the reverse for goods, dragging down the UK’s trading position with the rest of the world.
The current account deficit reached a peacetime record at the end of 2015, largely because of the fall in receipts from investments overseas and rises in payments from the UK to foreign investors.
The UK has suffered particularly in relation to other EU states, whereas it has a slight surplus with the rest of the world.