Late 2016 UK growth surge starting to run out of steam

Cantillon: Economic weakness could soften Britain’s negotiating position on Brexit

 British prime minister Theresa May  welcomes European Council president Donald Tusk  to 10 Downing Street for Brexit talks on Thursday. Photograph: Andy Rain/EPA

British prime minister Theresa May welcomes European Council president Donald Tusk to 10 Downing Street for Brexit talks on Thursday. Photograph: Andy Rain/EPA

 

Is the British economy finally starting to feel the Brexit headwinds? The news cycle moves quickly these days and so when the British economy held up well in the wake of the Brexit vote, the consensus forecast was that the initial pessimism had been overdone. However, Brexit was always going to be a long game. Britain will not leave the EU until early 2019, after all. And there are clear signals starting to appear that the growth surge seen in the UK late last year is running out of steam.

On Friday, a range of separate data came in below expectations, albeit that some special factors were at play. Manufacturing output edged lower in February and there was a significant 1.7 per cent drop in monthly construction output. This ties in with evidence of house price weakness.

This does not add up to an economic collapse, but growth is slowing. The quarter-on-quarter level of GDP growth was 0.7 per cent in the final three months of last year. Estimates for the current quarter are now being trimmed to around 0.4 to 0.5 per cent.

Growing strongly Lower growth in the UK is, of course, not good for us, though it is important to recognise that other overseas markets are still growing strongly. Signs of slowing growth in the UK economy also tend to weaken sterling, another negative for us. That said, the UK currency was trading at 85.6p yesterday, a way off the 90p plus level touched in October, which set off real worries here.

Interestingly, perhaps, signs of economic weakness in the UK – and of increasing Brexit worries – could play to our advantage in one way. There are already signs that the British negotiating position is softening, driven no doubt by fears of the economic impact of a hard Brexit. This week British prime minister Theresa May, floated the idea that freedom of movement could continue for a period after Britain leaves. This could clear the way for a transitional period after 2019, which would limit the huge threats of Britain crashing out of the EU without a deal.

The more signs appear of weakness in the UK economy, the greater political cover May will have for this strategy. On the flip side, economic strength will embolden the pro-Brexit brigade. Every cloud has, indeed, a silver lining.

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