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UK Economy Grew Quicker AFTER the EU Referendum than it did Prior

Services PMI exchange rates

The UK economy grew at a faster pace in the second half of 2016 than it did in the first half suggests analysis from Lloyds Bank Commercial Banking.

The assessment comes following the release of December serivce sector PMI data which surprised analysts by coming in well ahead of expectations.

 

December's service PMI reading at an impressive 56.2 - this is well ahead of the forecast for 54.7.

In fact, the final quarter of 2016 was the year's strongest quarter - this despite the intense warnings made by the majority of economists we follow that the UK economy would fall into recession in Q4 due to the Brexit vote.

"The rate of expansion of activity accelerated for the third month running to the sharpest since July 2015, fuelled by stronger growth in new work," says a note from IHS Markit and the CIPS who compile the report. 

Taken alongside the manufacturing and construction PMI outturns, today’s rise in the services reading left the composite PMI at 56.7, up from 55.3 in November.

Analysts at Lloyds Bank Commercial Banking say overall GDP growth in Q4 could post a 0.5% q/q pace of expansion.

"Alongside the revisions to the recent history of GDP data in last month’s release, that would leave growth in the six months since the referendum in fact quicker than in the first half of 2016," say Lloyds.

The service PMI data also shows the growth of employment was maintained for the fifth month running in December.

The rate of job creation was unchanged from November’s sevenmonth high, remaining stronger than the long-run survey average.

The news comes as another survey suggests average salaries across the UK increased by 1.1% last month.

A leading UK independent job board, CV-Library, reported the rise which saw Cardiff, Liverpool and Manchester seeing particularly strong growth.

The news suggests the UK could enter 2017 with further positive momentum in the jobs market.

Growth Forecast to Ease Slightly

Concerning the outlook, there remains an abundance of warnings that the UK economy will slow down.

However, expectations for negative growth remain scant.

“A moderation in GDP growth in 2017 seems likely as rising inflation eats into households’ real income growth and dampens spending. Indeed, the rise in the output prices balance of the services survey to the highest level since April 2011, demonstrated the inflationary pressures building throughout the supply chain,” says Scott Bowman, UK Economist at Capital Economics in a note seen by Pound Sterling Live.

The PMI data does however confirm firms don’t appear to think inflation will have much of an impact in the near term.

“The forward-looking indicators of today’s services survey were
fairly encouraging. The future activity index rose from 65.3 to 68.5. What’s more, a rise in service sector new orders took the all-sector balance to its highest level since March 2015. This could reflect the support provided to activity from the lower pound and rock-bottom interest rates,” says Bowman.

Capital Economics forecast quarterly GDP growth to ease slightly in the coming from around 2.0% for 2016 as a whole to about 1.5% in 2017.

The Pound

The weakness of the Sterling exchange rate has meanwhile proven to be a double-edged sword for the services sector, as it has been for the manufacturing sector.

“There were reports of export business buoyed by the weak Pound, adding to the strength of domestic demand. However, sterling’s persistent lows added more pressure to input prices, which expanded at a rate close to November’s five-and-a-half year high as fuel, food, IT and wage costs went up," says David Noble, CEO at the CIPS.

Despite the data, the British Pound continues to take its cue from external drivers at present, hence the inability of the currency to recover against the Dollar and Euro. 

The currency remains sentiment-driven at present and traders will remain weary of exposing themselves ahead of upcoming Brexit negotiations.

 

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