The Brexit vote in the past year has had a major impact on the economy of UK. However, the actual data proved to be better than the forecasts. Even experts are surprised by the resilience showed by the UK economy in unfavorable circumstances. At the same time, the growth experienced in the final quarter can take a turn for worse as it highlights several weak links in the economy. In the fourth quarter of 2016, the GDP of UK increased by 0.6% and a majority of the growth is fueled by the services sector.
The growth in economy is not contributed by the manufacturing industries. Rather, the growth is fueled mainly by consumer spending and services. While any growth must be appreciated, experts warn that the current situation is not favorable for long term growth. In recent years, the services sector emerged as one of the primary reasons for the growth in economy. The contribution from agriculture, construction and industrial production sectors is very low. This is scary for the economy because the growth accelerated by services sector is not sustainable.
With an expected increase in the inflation rates, UK households spend more to purchase what they want while the price is affordable. This means that people are saving less and borrowing more money. This can put additional pressure of the households as the inflation affects the spending capacity. Many economists fear a slowdown in the economy in the upcoming year. Mark Carney, governor of the Bank of England has already put forth his views on the pressure to the economy due to increased inflation and decreased business spending.
The growth is enjoyed this time, but there are too many reasons that can disrupt household spending in the upcoming months. While the economy is trying to rebalance through exports, the results are not shown in the data. In November, the UK households borrowed at a much faster rate in 11 years. The growth fueled by consumption is not durable and it can decline suddenly. The UK credit also increased greatly compared to the last year.
In the Q4 of 2016, the industrial production sector showed a loss. The GDP growth of 0.6% is mainly powered by services sector that gained 0.8%. The restaurants and hotels industry also gained 1.7%, which is the highest since 2012. Overall, the economy gained 2% in 2016. Considering the circumstances, this growth is welcomed by economic experts even though it lost 2.2% compared to the last year. UK’s economy is at its weakest since the year 2013. In this year, the economy is set to lose another 1.2% due to the international pressure on the UK.
However, some economic experts suggest that there is no need to lose hope. Presently, the economy is healthy. The construction and manufacturing sector can also gain some pace as exports pickup in this year. The import costs have increased greatly as the currency lost 15% after the Brexit vote. Investment in the auto industry also decreased as the manufacturers don’t want to get involved in the Brexit confusion. Even with 2% GDP growth, the output per head in the UK increased by 1.3% as the population continues to increase.