The UK’s first official growth figures since the Brexit vote have confounded the government’s warnings of an immediate recession if Britain voted to leave the EU.
The economy was 0.5 per cent larger between July and September than three months earlier, according to the Office for National Statistics. The Treasury had predicted it would shrink 0.1 per cent.
Philip Hammond, the UK chancellor, welcomed the news, saying: “The fundamentals of the UK economy are strong, and today’s data show that the economy is resilient.
“The economy will need to adjust to a new relationship with the EU, but we are well-placed to deal with the challenges and take advantage of opportunities.”
Joe Grice, chief economist of the ONS, said the figures gave “the most comprehensive picture so far of the post-referendum UK economy … the economy has continued to expand at a rate broadly similar to that seen since 2015 and there is little evidence of a pronounced effect in the immediate aftermath of the [Brexit] vote”.
Alan Clarke of Scotiabank welcomed them as “a million miles from the zero or negative readings that we feared when survey indicators fell off a cliff after the Brexit vote”.
In the run-up to the referendum, David Cameron said “a vote to leave the EU would cause an economic shock that would tip Britain into recession and cost at least half a million jobs”. This warning and Treasury predictions of the longer term economic damage Brexit would cause were central to what Brexit supporters dubbed “project fear”.
Many economists and institutions — including the Bank of England and the International Monetary Fund — also warned that leaving the EU would have economic costs.
Some supporters of Brexit are demanding that the Treasury “publicly reject” their pre-Brexit forecasts. “With referendum campaigning complete and evidence these forecasts were utterly inaccurate, now is the time for humility” said Ryan Bourne of free market think-tank the Institute for Economic Affairs, one of the few economists who predicted Brexit would boost the UK economy.
Other economists say the new figures do little to reassure them. The UK is more than two years away from leaving the EU — the two-year process is to begin by the end of March next year — and there is no detail yet on its future relationship with the bloc, or with other countries.
“The outlook for 2017 remains poor,” said James Knightley of ING. “Consumer spending is likely to come under downward pressure as inflation eats into household purchasing power.” Economists also note that a slowdown in business investment suggested by some surveys could take time to materialise because businesses could finish existing projects but not start new ones.
Economists’ greatest fear is that Brexit will weaken trading relationships, limiting growth and making it harder to benefit from overseas skills and technological advances that would boost productivity.
“The fundamental shock … is a long-run change to the structure of the economy from the UK’s new trading relationships,” said Simon Kirby of the National Institute of Economic and Social Research.
The government is only in the very early stages of developing negotiating positions with the EU: it will be at least two years before the country knows what that trading relationship will look like and longer for deals with non-EU countries.
“We would not get too carried away,” said Ruth Gregory of Capital Economics. “It could be that the economy is in a post-referendum ‘sweet spot’, whereby some of the positive developments since the vote, such as action by the MPC have been felt before the major adverse consequences, such as a rise in inflation.”
The services sector, which makes up nearly 80 per cent of the UK economy, was responsible for all of the third-quarter growth, expanding 0.8 per cent. The three other sectors — industrial production, construction and agriculture — contracted.
There was particularly strong growth from the film and television industry. Film and TV programme production activity — which includes cinema ticket sales — grew 16.4 per cent, helped by the release of popular films such as Star Trek and The BFG over the summer. Even though this sector accounts for less than 1 per cent of the economy, it added 0.1 per cent to overall GDP growth.
The strength of services continues the pattern since the financial crisis, with output 12.1 per cent higher than its pre-crisis peak. In contrast, manufacturing is still 5.6 per cent smaller than at the start of 2008 and construction 1.3 per cent lower.
There was a brief charge in UK financial markets in response to the figures, lifting the pound to $1.2270, its highest level for a week. Markets had been uneasy beforehand, with the domestic-focused FTSE 250 index down 0.17 per cent and sterling at $1.222, just a few cents above its recent 31-year-low.
The preliminary estimate of GDP growth is subject to revision. The current figure was based on only 44 per cent of the data required for the final estimate. Growth in the second quarter was 0.7 per cent.
Additional reporting by Elaine Moore
UK growth confounds gloomy predictions – Financial Times