UK economy beats expectations to end an eventful 2016 on a positive note

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2016 was a punishing year for forecasting. In fact, if events turned out according to the consensus forecasts back in January 2016, we would be living in a rather different world today. A world where the UK remained in the EU, where Hilary Clinton became US president and where Italy had some semblance of government stability. You would be able to buy a barrel of oil for under $40 too.

The first of these events to defy expectations and the one striking closer to home – Brexit – was followed by another flurry of economic projections. The majority of forecasters – including EEF – saw economic activity in the UK slowing materially in the second half of the year as a result of the Brexit vote, with the average of forecasts in July at 1.5% for 2016, down from 1.8% just a month earlier.

Well, as today’s UK GDP figures show, those predictions didn’t exactly pan out as expected either. The UK economy powered through to post 2.0% GDP growth in 2016, a far cry from the 1.5% July forecast. Actually, as it turns out, growth came in closer to the 2.2% average forecast at the start of the year. If the figures are left unrevised, this would make the UK the fastest growing economy in the G7. Not bad eh?

 

What’s behind the resilience?

A simplified explanation is that nothing really changed between the referendum in June and the end of the year. Most businesses were aware that the process of exiting the EU would be a prolonged one and the outcome uncertain. Businesses were unlikely to pause activity or relocate part of their operations when most of the variables in the equation were still unknown. Consumers were unlikely stop spending because the UK would be leaving the EU in minimum two years’ time.

Nevertheless, that doesn’t mean that forecasters got it all wrong. The rationale behind those forecasts is still likely to hold – uncertainty will in time drag on business activity and the rise of inflation (in part due to the Brexit-induced sterling depreciation) will weigh on the seemingly insatiable appetite of consumers to spend. It’s rather the timing and trajectory of the hit on UK GDP that proved elusive.

Predicting reality is a complicated matter after all…

 

What drove growth in 2016?

Once more it was the services sector that did most of the heavy lifting in 2016. The services sector expanded by 2.8% over the year as a whole and contributed 2.2pp of the 2.5% growth in GVA over the year. The production sector contributed another 0.2pp, with construction adding the remaining 0.1pp. All in all, a familiar story for the UK’s GDP growth composition.

 

GDP-contrib---Q4-2016 

 

Manufacturing part of the growth story

The manufacturing sector also did its bit for UK economic growth. The sector expanded by 0.7% in Q4 2016, taking up its growth total for the year to +0.3%. No doubt a solid performance given the degree of uncertainty in the UK economy and the scale of the challenges facing the sector. Growth in 2016 was mainly driven by the rebound in global commodity prices and improving demand conditions in key overseas markets, with the sterling depreciation providing an additional boost to export competitiveness.

 

GDP-Q4-16---ukmfg 

 

In terms of manufacturing sectors, non-metallic minerals and motor vehicles were the star performers, while basic metals had another woeful year, contracting by a hefty 14.2% in 2016. Keep an eye out for more detailed sectoral analysis on the EEF blog over the next few days.

 

What should we expect in 2017?

2017 is likely to be another nightmare year for forecasting. Uncertainty about pretty much everything – Trump’s policies, the progress of the Brexit negotiations and elections in the Eurozone’s two largest economies – will continue to attach a greater degree of difficulty to economic projections.

Still, we expect that the impact of rising inflation on consumers’ pockets and the impact of uncertainty on business planning will lead to, not a collapse, but a gradual slowdown in UK economic growth over the course of the year. Similarly, risks for manufacturing businesses abound and we expect growth in the sector to lose momentum in 2017.

And how the Government’s new Industrial Strategy shapes up could well prove to be 2017’s wild card…

 

 

 

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This person has now left EEF. Please contact us on 0808 168 1874 or email us at enquiries@eef.org.uk if you have any questions.

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