The economy in the United Kingdom grew at an annualized rate of 1.7% in the second quarter, in line with expectations and the previous estimate released by the Office for National Statistics.
“GDP growth has slowed markedly in the first half of the year with relatively robust services growth, partly thanks to a booming film industry, offset by weak performances from manufacturing and construction in the second quarter,” Darren Morgan, the ONS’ head of GDP said in a statement.
Of particular concern is the fact that what growth there was in the second quarter for the UK, it was mostly driven by government spending and not businesses and consumers. Business investment showed no growth at all and consumer spending was weak.
Many economists expected the vote in Britain to withdraw from the European Union, popularly known as “Brexit,” to have an immediate and sharp impact on the British economy. That did not happen. But, it is starting to appear that instead of a sharp reset, the effects of Brexit will still be negative and felt over a longer period of time. Uncertainty over the future is likely hindering business investment. Consumer spending is likely also hampered by uncertainty, but even more so by inflation in the goods sector spurred on by a weaker British pound. A British pound is currently equal to US$1.28, down substantially from about US$1.50 prior to June 2016’s vote. As a result, British inflation is now touching close to a 3% annual rate, compared to 2% in the United States and about 1.5% throughout continental Europe.
A chart included as part of the ONS release shows the growth slowdown in the UK, with GDP growth reported on a quarter over quarter basis.
In a different context, British annualized GDP growth has run at 1.0% per year between 2007 and 2017. Global GDP growth has also been weak during that period due to the financial crisis that started in 2008. Still, that compares to growth of 1.4% per year over the same time period in the United States and 1.3% in Germany. In the current year, British growth is estimated to be 1.5%, a slowdown from last year’s 1.8%, while growth in the United States is expected to accelerate to 2.2%.
Those differences in annualized growth may not seem to be substantial, but the compounded effect can be material over time. The cumulative growth produced between the period of 2007 and 2017 has been 16.5% for the United States and 15.3% for Germany, but only 11.8% for the UK. Had the UK grown at the same rate as the United States did, it would mean UK GDP would be £72 billion higher today than it is, which mean that average incomes in the UK would be more than £1,000 higher than they are.
Of particular concern is the fact that the current slowdown in Britain comes as the rest of the continent is beginning to report better growth numbers.
Britain may have escaped a sharp downturn from the Brexit vote, but that does not mean they have escaped the pain entirely or that the next few years will not be even more painful.