GDP: what's behind the figures?

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Yesterday we got our first look at how the UK economy performed in the final three months of 2016, and the year as a whole. As has been the case for much of the second half of the year, we were pleasantly surprised.

GDP came in at a solid 0.6% for the final quarter of the year, the same as the previous two quarters, dispelling any lingering fears of a post Brexit collapse.  In fact if we exclude North Sea oil and gas, which is notoriously volatile, the economy actually grew by 0.7% in the final months of the year, an impressive performance and a far cry from the doom and gloom being predicted in July.

The steady growth throughout the year, has resulted in the economy expanding by 2.0% for 2016, a healthy if not earth shattering performance.

 

So what's behind the headline figures?

The dominant UK services sector, which makes up approximately 78% of the economy was the driving force behind the growth in 2016, increasing by 2.8% and contributing 2.2pp to overall 2.5% growth. Resilient consumer demand in the wake of the Referendum result helped pave the way for steady growth, no doubt supported by ongoing supermarket price wars, helping to dampen the pass through of rising input costs to consumers.

The strong performing service sector helped to mask weaker performance across the other sectors. Production, which includes manufacturing increased by 1.1% in 2016, while construction grew by 1.4%. This was despite a fairly hefty contraction of 0.8% in the third quarter. The agriculture sector contracted by 0.6%, but given its small proportion of the economy this had little effect on overall growth.

 

GVAchange 

 

But what about manufacturing I hear you ask

Manufacturing had an up and down year, ultimately posting growth of 0.3%, 0.3pp less than we at EEF were predicting at the start of the year. However given the uncertainty shrouding the macroeconomic environment (as well as the unexpected vote to leave the EU) this was a fairly good innings. The substantial fall in growth in the third quarter (-0.8%) was the nadir, but as we said at the time this was likely to have been at least partially due to a winding down from the impressive growth seen in Q2.

Healthy demand conditions across key export markets, as well as the pick-up in oil prices following months around the $40 a barrel mark, has helped contribute to the overall growth. The much documented fall in sterling is also likely to have boosted exports in the last few months of the year, with recent trade performance backing this theory up.

There has however been much variation amongst sectors. Non-metallic minerals posted impressive growth of 8.5% in 2016.  Special mention must also go to the automotive sector which grew by 4.4% in 2016, hitting a 17 year production high in the process. Conversely metal products and electrical equipment sectors struggled badly, contracting by a hefty 14.2% and 5.7% respectively. The electrical equipment sector is perhaps feeling the effects of the recent depreciation in Sterling more severely, given that it is heavily dependent on imported components.

 

Sector-variation-GVA 

 

Overall, if these figures remain unchanged, a relatively good year for manufacturing given the circumstances. As George blogged yesterday, the outlook remains uncertain, with investment and consumer spending likely to dampen. However the UK economy, and in particular its people have proven to be a resilient bunch , so perhaps the easing of growth may not be as great as some fear. Here’s hoping anyway

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Economist

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