The revised GDP figures suggest the response to Brexit uncertainty since the referendum has been larger than previously thought. While headline GDP growth was little changed in recent years, household spending growth has slowed more than previously thought.
Households are healthy while the government lends a hand
- The revised GDP figures suggest the response to Brexit uncertainty since the referendum has been larger than previously thought. While headline GDP growth was little changed in recent years, household spending growth has slowed more than previously thought.
- The comprehensive estimate of GDP in the Quarterly National Accounts confirmed that the economy contracted by 0.2% q/q in Q2. But thanks to small upward revisions to Q4 and Q1, annual growth was revised up slightly from 1.2% to 1.3%. (See Table 1.) Annual growth was also revised up in 2017 and 2018, both from 1.8% to 1.9%.
- There were some more significant changes to the drivers of growth. Annual growth in government spending was revised up from 2.7% in Q2 to 4.0%. The level of business investment was also revised up, by 5%. But given annual business investment growth in 2015 was revised up from 5.1% to 9.6%, the slowdown to -1.4% since the referendum looks even sharper.
- The new picture of the economy contained some good news too. Annual consumer spending growth was revised down from 1.8% in Q2 to 1.1%. But when combined with an upward revision to real household disposable income, thanks to recent strength of the labour market, that led to the saving ratio being revised up from 4.1% to 6.4% in Q1 rising to 6.8% in Q2. (See Chart 1.) That should allay fears that consumers are overstretched. Instead, the risk is that Brexit uncertainty prompts them to tighten their belts further.
- Finally, the current account deficit narrowed from £33.1bn (6.0% of GDP) to £25.2bn (4.6%), mainly due to a fall back in imports as the sharp rise ahead of the original Brexit date at the end of Q1 unwound. Seeing as that was due to Brexit timing effects, the narrowing in the current account deficit it isn’t a sign of things to come.
- Overall, the response of households and businesses to uncertainty since the EU referendum appears to have been much larger than previously thought. That suggests a scenario in which Brexit is repeatedly delayed would be more harmful to the economy than previously anticipated.
Chart 1: Household Saving Ratio (% of Total Income)
Sources: Refinitiv, ONS, Capital Economics
Table 1: GDP by Expenditure (Components of GDP, % q/q Unless Stated)
Fix. Capital Formation
Stockbuilding(Cont. to Growth1)
Sources: Refinitiv, Capital Economics, 1Excluding alignment adjustment
Andrew Wishart, UK Economist, +44 20 7808 4062, firstname.lastname@example.org