GDP data for the last quarter of 2016 presented yesterday beat analyst expectations and confirmed that the UK continues to shun a negative impact from the 23 June Brexit vote.
Contributions to the overall 0.6% quarter-on-quarter increase were noted in particular in the services sector, which underpins the robustness of the UK consumer. Ironically, the strong contribution from business and finance services could be a drawback resulting from the Brexit, as investors and businesses begin to seek more guidance. Manufacturing, expected to profit from the weakness of the pound sterling, offered only a minor contribution of 0.1%.
Looking forward, leading indicators suggest that momentum will remain strong also in the first quarter of 2017. Signals that the expected headwinds from the looming Brexit are approaching are yet ambiguous. Hiring recovered at the turn of the year, while investment intentions have remained modest but stable over the last few months. Nevertheless, the strong reliance of growth on consumption presents some risks: with surging inflation due to pound weakness, consumption will most likely experience some squeeze going forward.
So far, growth remains broadly unaffected by the Brexit referendum. Some vulnerability is visible with the strong reliance on private consumption. We continue to expect adverse Brexit effects later this year, once the negotiations are well underway.
David Meier is an economist at Julius Baer