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Strong services sector helps economy avoid Brexit slowdown

Published 25/11/2016

GDP figures are up for third quarter.
GDP figures are up for third quarter.

Britain's economic growth has been confirmed at 0.5% in the third quarter, as business investment and service sector output rose in the months following the EU referendum, the Office for National Statistics (ONS) said.

In its second estimate of gross domestic product (GDP), ONS figures confirmed that the economy escaped a major slowdown in the three months after the Brexit vote thanks to a strong performance from Britain's powerhouse services sector.

The ONS said the numbers showed "limited effect so far from the referendum".

ONS figures also show that business investment grew between July and September, despite fears that it would take a major hit in the wake of the referendum.

Business investment rose 0.9% to £44.2 billion in the third quarter, compared with £43.8 billion over the previous three months.

The rise has been attributed to an increase in investments in building projects including ships and planes.

However, on a year-on-year basis, business investment dropped 1.6% from £44.9 billion to £44.2 billion, marking the third consecutive annual decline.

Services sector output grew 0.8% between July and September, thanks to strength across distribution, hotels and restaurants, business services and finance.

Darren Morgan, head of GDP at the ONS, said: "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.

"That, 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."

The news comes days after it was revealed that the British economy is set to take a hit of almost £60 billion over the coming five years as a result of the vote to leave the European Union.

The Office for Budget Responsibility (OBR) slashed growth forecasts and predicted higher than previously expected borrowing.

The OBR said the Government could be expected to borrow £122 billion more over the five years to 2020/21 than it predicted at the time of the Budget in March, with some £58.7 billion of this directly attributable to the referendum result and the cost of leaving the EU.

Howard Archer, chief European and UK economist at IHS Markit, is forecasting a 2.1% jump in full-year GDP, assuming that growth over the last three months of the year reaches a "respectable" 0.4%.

"October's surge in retail sales suggests that there is a very real possibility that growth in the fourth quarter could again surprise on the upside," Mr Archer said.

James Knightley, senior economist at ING, said the growth figures suggests the economy has weathered the Brexit storm very well "so far".

Household expenditure rose 0.7% in the three months to September, after rising 0.9% in the second quarter.

But rising inflation and the impact of Brexit uncertainty are set to hit both investment and household spending next year.

He said: "Our main concern relates to a squeeze on household spending power brought about by a sharp pick-up in inflation that isn't matched by wage increases.

"We also expect a slowdown in hiring and investment by businesses as Brexit uncertainty kicks in and the political pressure rises once Article 50 is triggered."

Mr Archer is expecting growth to "slow markedly" to 1.2% in 2017.

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