Philip Hammond claims strong growth, but it’s mostly froth
No chancellor can resist the idea of a good photo opportunity and Philip Hammond chose a brewery to mark the release of Britain’s latest growth figures. As he pulled a pint for the cameras, the chancellor’s message was that the strongest expansion in almost two years was proof of the underlying health of the economy. It was no such thing. This was a glass mainly full of froth.
On the face of it, the economy has been picking up speed throughout 2018. Growth was 0.1% in the first quarter, 0.4% in the second quarter and has now hit 0.6% in the third quarter. But what actually happened was that bad weather in the first few months of the year artificially depressed activity and this weakness has been followed by a period of catch-up, especially in the construction sector.
On top of that, a combination of a summer heatwave and England’s unexpected progress in the World Cup boosted retail spending in July, the first month of the third quarter. In both August and September, the economy flatlined and forward-looking surveys suggest a slowdown to 0.2-0.3% in the final three months of the year. Spending in the high street and online fell back after the summer surge, which either means that consumers are saving their money for a Christmas spree or that retailers are in for a miserable festive season. Either way, the third quarter was as good as it gets for now.
Nor does the breakdown of the flash GDP estimate support Hammond’s argument that the economy is in tip-top shape. Business investment fell by 1.2%, the third quarterly decline in a row. That has not happened since the financial crisis of a decade ago, with the inescapable conclusion that Brexit uncertainty is leading to firms deferring spending while the negotiations drag on.
One encouraging aspect of the GDP data was that trade contributed 0.8 percentage points to growth in the third quarter. Again, though, this was slightly illusory since imports of cars were significantly depressed by EU emissions tests.
While UK growth accelerated in the third quarter, growth in the eurozone went in the other direction, halving from 0.4% to 0.2%. Italy went sideways, while it looks likely that figures next week will show a small decline in German activity.
The underlying picture, however, is similar. Growth in the UK has been modest for a decade despite the colossal amount of stimulus provided by the Bank of England. The same applies to the eurozone, where the impact of the European Central Bank’s activity-boosting measures is now fading. It wouldn’t take much – on either side of the Channel – to turn fragility into something a whole lot worse.
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