Better than expected

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Today the Office for National Statistics released the first GDP reading for the last quarter of last year and the results were again slightly higher than expected. In the last three months of 2017 the UK economy expanded by 0.5%. If the first release is confirmed, this would mean that the UK grew by 1.8% in 2017, slightly down from 1.9% in 2016.

A resilient year for (almost) everyone

Since this is the first release, only GDP by output has been released and the full breakdown by expenditure (consumption, investment, and net trade) will be available in the next publication (22nd February).

Looking at the sectors, 2017 has been a positive year for most of them. The only two exceptions were agriculture and the electricity and gas sector (the two sectors together make up only 2.2% of the British economy). As always, the best contribution to expansion came from the service sector which grew by 0.6% in the quarter and 1.6% in the whole 2017. However this major UK sector is giving some signs of weakening in the domestic orientated sectors to underline once more how this expansion is strictly related to a global uptick.

The beleaguered construction sector ends the year with another weak performance contracting 1% in the quarter even if the “Carillon” effect won’t be in the numbers until the release of the first quarter of 2018 data. On the positive side, the boom experienced by the sector in the first half of the year, allows construction to overall expand by 5.1% in 2017.

The good news keeps on coming

The manufacturing sector is again a bright spot as we have been saying for a while.

In 2017 the sector expanded by 2.7% and growth in Q4 was 1.3%, the best amongst all the sectors. This is the best annual performance since 2014 and it is well above the average of the last 10 years. Thanks to manufacturers, the whole production sector was able to expand 0.6% in the quarter even if the well-known issues related to the Forties pipeline made the mining and quarrying sector contract by 3.9%. However, considering that the issue arise in mid-December, the effect may also be seen in Q1 2018 data.

Manufacturers need to continue to perform well to reach and overtake the pre-crisis level which is still 2.1% higher than current output levels. A healthy global demand and the forward looking positivity shown in our Manufacturing Outlook and Executive Survey should help them to reach this goal.

Were we not supposed to grow just by 1.5%?

Yes, that’s true and even if UK actually expanded by 1.8%, the forecast for 2017 growth cannot be considered wrong.

Let’s explain this in a bit more detail.

It’s all about past revisions to data. Most of the forecasts were computed after the first and second GDP releases for the third quarter of 2017. However ONS, during the third GDP reading, revised the last two quarters of 2016 and, a little bit counter-intuitively, this had an effect on 2017 GDP. In other words, since we are comparing 2017 against 2016, which has ended up higher than previously thought, annual growth is higher too even if quarterly growth for the entire 2017 hasn’t been affected.

As the table shows, quarterly growth rates remained the same for the entirety of 2017, but the value in millions of Pounds was higher and annual GDP raised as a consequence.

GDP_table_revision 

Revisions, even if they might be annoying for forecasters, are a sign that the statistical office is continuously trying to improve their measurements and it is ready to amend any inevitable mistakes due to lack of available data and approximations. In this particular case, the new methodology involves a more comprehensive use of VAT data and a much wider sample which should improve future estimation.

The rest of the world is running fast

As we said in the last quarter release, most of the world is growing fast and expanding. UK was the top grower amongst G7 countries in 2014 and, thanks to the latest revision, also in 2016. When not at the top, the UK has always been close to it. However, for 2017 this hasn’t been the case. The ONS is the first statistical agency to release GDP data for the last quarter of 2017, so a proper comparison is not yet possible (US will be second releasing GDP data later on today, expectations are for quarterly year on year growth of 3%).

Thanks to the unexpected 2016 boost, Britain should end up third from the bottom after Japan and Italy, avoiding the risk of being last. The economy is still performing better than expected in the aftermath of the EU referendum, however it appears clear that the UK is not fully benefitting from the current global synchronised growth. According to the IMF, the G7 GDP growth ranking for the next year will be roughly the same with UK ranking 5th out of 7.

GDP_2017_world 

As Martyn said a couple of weeks ago, we are currently expecting a GDP growth of 1.3% for the next year...well, 1.3% if no big revisions for 2017 are announced. Watch this space.

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