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UK economy grows at fastest quarterly rate in two years

Although there was much talk of sealing a deal on Brexit this week, uncertainty surrounding our future with the bloc was blamed on the UK’s dominant services sector underperforming in October. The HIS Markit purchasing managers’ index fell to 52.2 in October, down from 53.9 in September, well short of expectations for a reading of 53.8.

It appeared to be a damning indictment on the economic impact of Brexit, given that companies said uncertainty was hitting demand for services such as law, advertising and finance, which are some of our largest exports. Overall, the services sector accounts for around 80% of UK GDP. “The disappointing service sector numbers bring mounting evidence that Brexit worries are taking an increasing toll on the economy,” said Chris Williamson, chief business economist at IHS Markit. Other analysts pointed out that, apart from the reading after the referendum in July 2016, this latest survey indicates confidence at its lowest level for six years.

That view chimed with another survey released by the Institute of Chartered Accountants. In its business confidence monitor (BCM) showed a decline from -0.2% to -12.3% after the Salzberg meeting of EU leaders during which the UK government’s Chequers plan was ripped apart. The pessimism is spread throughout the UK although the worst readings came from the South West, Scotland and Northern England. London was at the more optimistic end of the range.

However, on Friday, the Office for National Statistics released its first estimate for UK GDP in the third quarter, and announced growth of 0.6%, up from 0.4% in the second quarter. The ONS said all four sectors of the economy made a positive contribution to growth in the period, but data suggests the economy lost momentum towards the end of the quarter, since most of the growth was generated during the summer heatwave, with GDP growth flat in September. If correct, it would be the fastest quarterly growth rate since the end of 2016. The ONS said that consumer spending rose by 0.5% in the quarter but business investment was down by 1.2%.

Despite the strong headline figure, analysts urged caution. The Bank of England is already forecasting a slowdown in economic growth to around 0.3% in the fourth quarter, with numerous surveys indicating a loss of momentum in the current period.

Growth in UK house prices slowed to its weakest rate in five years in the quarter to October, according to mortgage lender Halifax. Prices rose by just 1.5% on an annualised basis, down from 2.5% annual growth in the three months to September. The poor reading was in line with Halifax’s expectations, however.

Recent data on mortgage approvals confirms a slowing market, although broadly speaking, the market data is skewed downwards by poor readings in London; some other regions are performing relatively well as buyers take advantage of better affordability. Another property survey by the Royal Institution for Chartered Surveyors this week also pointed to the property market being at its weakest in six years.

Meanwhile the US Federal Reserve kept interest rates on hold this week, but analysts are now predicting a likely rate rise in December as the economy continues to perform strongly.

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Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

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