Slower domestic growth in 2017 but an improved trade balance: a welcome rebalancing of the economy

Slower domestic growth in 2017 but an improved trade balance: a welcome rebalancing of the economy

Date: 26^th February 2018

Slower domestic growth in 2017 but an improved trade balance: a welcome rebalancing of the economy

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the ONS's revised GDP data (26 February):

• GDP growth was revised to 0.4% (QOQ) for 2017Q4 (from 0.5%) and to 1.7% (YOY) for the year 2017 (from 1.8%).
• Household consumption's contribution to growth weakened between 2016 and 2017, but the trade balance improved significantly, resulting in a better-balanced economy. The contribution of gross fixed capital formation (capital investment) also improved in 2017.
• On the output side, although though the contribution to GDP growth of the services sector weakened in 2017 it, nevertheless, remained the largest component, by far.

In addition, there have been several key data releases, including:

• CPI inflation was unchanged in January, but producer prices inflation eased.
• House prices rose 5.2% (YOY) in December; London showed the weakest annual increase.
• Retail sales growth was a subdued 0.1% (MOM) in January.
• The Bank of England Agents' report said growth was 'steady at a modest pace'. The report also said companies expected average pay settlements to pick up to 3.1% in 2018, after 2.6% in 2017, reflecting recruitment difficulties.
• The labour market remains robust, despite a pick-up in unemployment in 2017Q4. Earnings (both total and regular) were 2.5% higher (YOY) in 2017Q4.
• Productivity (output per hour) was provisionally estimated to have risen 0.8% (QOQ) in 2017Q4.
• Public sector net borrowing showed a better-than-expected surplus of £10.0bn in January and borrowing for the first 10 months of FY2017 was £7.2bn down on a year earlier. The OBR forecast borrowing of £49.9bn in November for FY2017 (full year). It is likely to be around £40-45bn.
• The OBR will provide revised economic forecasts for the March financial statement (13 March) - which is expected to be brief.
• Net immigration was 244,000 in the year ending September 2017, compared with 230,000 in the year ending June 2017, but net immigration from the EU fell further to 90,000. Net immigration from non-EU rose to 205,000, whilst net emigration by UK citizens was 52,000.

Brexit developments included:

• The UK Government released a document on the 'implementation period', in response to the Commission's paper of 7 February on the 'transition period'.
• At Chequers, the 'Brexit War Cabinet' broadly agreed a position on the future UK-EU relationship. The Prime Minister is due to give a speech on the issue on 2 March.
• The Commission seemingly rejected the main thrust of the UK's stance on the future UK-EU relationship, whilst European Council President Donald Tusk suggested that the UK's approach was 'pure illusion'.

Eurozone developments included:

• Eurostat confirmed that Eurozone GDP had grown by 2.5% in 2017, the fastest since 2007.
• The result of SPD members' ballot on the proposed German CDU-SPD coalition is due on 4 March. The result is in the balance.
• The Italian general election is due on 4 March. The most likely outcome seems to be a win for the Centre-right coalition with Berlusconi's Forza Italia having the upper hand.

Ruth Lea said, 'The ONS's latest GDP estimates suggest a much-needed rebalancing of the economy occurred in 2017. Granted higher inflation, part triggered by the weaker pound, ate into real incomes and slowed household consumption growth. But the weaker currency, along with better global growth, led to a significant improvement in the trade balance. Capital investment also grew well.'For full story: http://www.arbuthnotgroup.com/economic_perspectives_group.html

Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
ruthlea@arbuthnot.co.uk  
Follow Ruth on Twitter @RuthLeaEcon

Maitland:
Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151
arbuthnot@maitland.co.uk