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Business investment boosts UK economic growth after Brexit vote

by International Commercial Investment on December 2, 2016

Source: FT.com

Better than expected business investment and consumer spending drove UK economic growth in the three months following the EU referendum, according to detailed figures published by the Office for National Statistics.

Business investment increased 0.9 per cent in the third quarter of 2016 compared with the previous three months, instead of a consensus prediction of a 1 per cent decline.

Business investment has been at the centre of the debates about how the UK economy will be affected by the Brexit vote, with economists expecting companies to slow their investment because of uncertainty about future trade arrangements. There was no evidence of this in the third quarter, however.

“Investment by businesses held up well in the immediate aftermath of the EU referendum, though it’s likely most of those investment decisions were taken before polling day,” said Darren Morgan, head of GDP at the ONS.

Mr Morgan added: “Business investment, coupled with growing consumer spending fuelled by rising household income, and a strong performance in the dominant service industries, kept the economy expanding broadly in line with its historic average.”

GDP growth was not revised in either direction from an initial estimate of 0.5 per cent, the release on Friday said.

Business investment covers the creation of new non-financial assets such as buildings, machinery and intellectual property.

“Uncertainty indicators ahead of the referendum and in the immediate aftermath were pointing to the kind of uncertainty that would lead corporates to hold back a bit,” said Peter Dixon, UK economist at Commerzbank. But he added that it was “too early to declare victory” because companies take a long time to adjust their investment decisions.

On Wednesday the Office for Budget Responsibility, which produces independent forecasts for the UK government, published a forecast that reductions in business investment would reduce the country’s long-term economic potential by 1.1 per cent by 2018. This prompted anger among pro-Leave politicians, who accused the OBR of producing “another utter doom and gloom scenario” and called its forecasts worthless.

Defenders of the OBR fought back by pointing out that many of its predictions were noticeably more positive than those made by other bodies, including the Treasury.

For the third quarter the rest of the increase in GDP was explained by household consumption increasing 0.7 per cent, government consumption growing by 0.4 per cent and the UK’s trade deficit narrowing slightly compared with the previous quarter.

However, big swings in the amount of gold held by British households and companies rather than trade in other goods and services accounted for the improvement in the trade balance. This is a very volatile part of GDP and unlikely to be related to any fundamental change in the economy.

Employee compensation — wages, pension contributions and in-kind payments — increased 0.7 per cent, unadjusted for inflation. This was the biggest contributor to growth in incomes. Corporate profits rose 0.2 per cent.

The index of services, which was published the same day, showed growth in the sector had kept pace with recent trends. Services account for about 80 per cent of the UK’s economic output.

International Commercial InvestmentBusiness investment boosts UK economic growth after Brexit vote