The UK economy is so far showing resilience following the Brexit vote. GDP growth came in at 0.5% in the three months to September, slightly slowing from 0.7% in the second quarter but far above market expectations of a slowdown or a recession in the immediate aftermath of the referendum.
The growth performance was driven by a solid expansion in services, which accelerated to 0.8% in the three months to September from 0.6% in the previous quarter. This more than offset the drop in the other sectors of the economy.
In particular, manufacturing was a major drag on GDP growth, contracting by 1% in the three months to September. Rather than a post-Brexit collapse, the trend suggests manufacturing is sliding back after an outstanding, six-year high growth performance in the second quarter. Indeed, pharmaceuticals and transport equipment showed the most negative contributions after robust growth in the second quarter.
While GDP figures largely surprised to the upside, they tell us little about what’s coming next. Yet we know that risks remain skewed to the downside, both for GDP and manufacturing. The gradual pickup in CPI inflation will squeeze households’ disposable income and weigh on consumer spending, but the trend is more likely to materialise over the course of next year. Similarly, business investment is likely to contract as a result of heightened uncertainty on the UK’s relationship with the EU, but a major collapse is unlikely in the short term as companies continue to do "business as usual" for the moment. On the other hand, the depreciation in Sterling means that net trade should be less of a drag on GDP.