27th July 2016
The UK economy grew at 0.6% in the second quarter of the year defying expectations that it would repeat the first quarter’s 0.4%. The figures have been welcomed by the Chancellor of the Exchequer Philip Hammond as placing the UK in a good position before Brexit negotiations begin. Analysts have urged some caution given that only one post Brexit week is included and that the figure for June is a forecast. However some are hopeful that the economy may prove more resilient than some have suggested.
Ben Brettell, Senior Economist, Hargreaves Lansdown
“The UK economy shook off pre-referendum nerves to grow by a better-than-expected 0.6% in the second quarter, with a notably strong performance from the manufacturing sector.
“It’s always difficult to tell where you’re going by looking in the rear-view mirror, and as such today’s GDP figures can’t be taken as evidence of the current climate. However, what they do show is an absence of pre-Brexit concerns, meaning that if the forecast downturn does materialise, at least we start from a position of relative strength.
“To assess what might happen next, we need to look at so-called ‘leading indicators’, such as survey data. These universally make for pretty grim reading, and point to a likely slowdown and possible recession in the coming months. Consumer confidence fell at its fastest pace in 22 years in the aftermath of the vote, while 30% of business leaders said they were likely to either freeze recruitment or lay workers off. Last week’s PMI survey came in at 47.7, with a number below 50 signalling a contraction in activity. The slump was the fastest since early 2009.
“With confidence this low, a recession can become a self-fulfilling prophecy. Yet there are also tentative signs things might not turn out as bad as the doom-mongers predicted before the vote.
“A Bank of England survey this month found no clear evidence of a slowing in economic activity, while there has been a raft of good news from the corporate sector. For example, GlaxoSmithKline has announced a £275m investment programme to expand its UK manufacturing operations, and this morning’s statement from Taylor Wimpey said the housebuilder had seen ‘no meaningful change’ in trading as a result of the referendum. There also seems to be growing optimism the UK can retain access to the EU’s single market in the event of Brexit.”
“All eyes now turn to the Bank of England’s interest rate decision next week. Remarkably, swap markets are now pricing in a 99% chance of a cut to 0.25%, and even the MPC’s arch-hawk Martin Weale has indicated his stance has shifted towards backing a cut.”
Adrian Lowcock, head of investing, AXA Wealth
“Not too much should be read into this statistic – it is the first reading and uses about 44% of the data and only includes a forecast for June. Whilst it does show the UK recovering from a slow down earlier in the year and solid growth in our services sector, given the result of the EU referendum this data is a historical figure. The true impact of the decision to leave the EU on GDP is unlikely to be seen until October when we get the first estimate for the 3rd quarter covering the first three months after the vote. By that time we may have a better understanding on its impact and the outlook for the UK economy through unemployment, consumer and business confidence figures.”
Chris Towner, economist at HiFX
“The Pound continues to consolidate amid conflicting pre and post Brexit economic data. Q2 GDP came in stronger than expected up 0.6%, 2.2% year on year helped by the strongest industrial output reading since 1999. However mortgage approvals for June fell to their lowest level since March 2015.
“It is now expected for the Bank of England to cut by 25bps next week. Anything more stimulating would be too dramatic, whereas no action would now be a surprise. Overall the economy had a good first half to 2016; however confidence in the near term has been dented somewhat by Brexit and the UK economy needs to acclimatise. Sterling remains surprisingly stable at 1.3100 and 1.1900 against the US dollar and Euro respectively as uncertainty weighs up against the fact that Sterling is a lot more attractive now at these levels, some 10% lower for foreign investors.”
Ian Forrest, Investment Research Analyst at The Share Centre
“The Office for National Statistics said this morning that the UK economy grew 0.6% in the second quarter, up from the 0.4% seen in the first quarter and higher than the 0.4% average forecast by economists.
“This was the first estimate and includes less than half the data used for the final figure, but it confirms that the UK economy was in robust health in the run up to the EU referendum in late June. Naturally, we will have to wait until later this year and into next year to see if there has been a negative impact of Brexit on GDP as many expect. Investors should note that last week the International Monetary Fund downgraded its forecast for UK economic growth from 1.9% to 1.7% for 2016.
“In the three months from April to June output in the services and production sectors of the economy increased whereas construction and agriculture saw decreases. The data had relatively little impact on the market with sterling weakening slightly. These figures follow mixed economic data last week which included strong employment numbers but poor retail sales and PMI survey results which were the first since the EU referendum.”