UK economic growth picks up pace – CBI Growth Indicator

Private sector growth in the UK picked up in the three months to February 2017, according to the latest Growth Indicator from the Confederation of British Industry (CBI).

The survey of 778 respondents across the manufacturing, distribution and service sectors showed that growth rose to a balance of +15%, climbing from the balance of +10% in the three months to January 2017.

The uptick was largely driven by a rebound in consumer services, which saw the fastest growth in business volumes since August 2015. Retail sales and manufacturing output also grew at a solid pace, the latter mirroring its performance in the quarter to January 2017. However, the business and professional services sector saw no change in volumes.

Looking ahead, companies across sectors expect to see similarly decent growth (+17%) over the next quarter.

Inflation will dampen households’ spending power

According to CBI Chief Economist Rain Newton-Smith, “The economy is growing solidly, with consumer-facing sectors leading the way for now. And it’s encouraging that firm growth is expected to continue over the next three months.

“However, with inflation set to rise even further, this will dampen households’ spending power, and growth is likely to slow as the year progresses. Rising costs will add to the pressures on businesses too, so they will be looking for a steady hand on the tiller at the Budget and action on the rising burden from business rates.

“By committing to invest in skills and innovation, through a truly modern Industrial Strategy, the Chancellor can take long-term steps to set the British economy on the right path for the future.”

Key economic indicators

Yesterday, the CBI’s regular roundup of the key economic indicators reported that retailers expected their business situation to deteriorate over the next three months. The roundup included the following key points:

  • Data from the Office for National Statistics (ONS) show that retail sales (including automotive fuel) unexpectedly fell by 0.3% on the month in January 2017, following a drop of 2.1% in December 2016, disappointing consensus expectations of a rise of 1.0%. The largest downward contribution came from non-store retailing, which fell 4.1% in January. Annual retail volumes growth also decelerated to 1.5% over the year to January, marking the weakest growth since November 2013.
  • The CBI’s latest Distributive Trades Survey suggests that retail sales grew modestly in the year to February, driven by the clothing and non-store sectors, though the sector is clearly facing challenges. Employment fell at the fastest pace for two years, and a similar reduction in headcount is expected next month. And for the first time in four and a half years, retailers expect their business situation to deteriorate over the next three months. Higher costs are feeding through to inflation, with average selling prices increasing at the fastest pace in almost six years and prices set to rise even more rapidly next month.
  • According to the CBI’s Service Sector Survey, demand in the services sector picked up a little in the three months to February. Underpinning the pick-up was consumer services, who saw volumes rise at the fastest pace since August 2015, whereas business and professional services reported that volumes were flat. Rising costs are putting pressure on prices across both sectors, with expectations for selling price inflation climbing to the highest in a decade among business and professional services, while among consumer services they rose to a nine-year high.
  • Activity also appears to be strong in manufacturing: the CBI’s Industrial Trends Survey found that total orders reached a two-year high, with the strengthening in demand led by the mechanical engineering and metal products sectors. Output growth remained robust in the three months to February and is expected to increase at a faster pace over the coming quarter, with expectations at their highest since September 2013. But once again, firms expect prices to rise strongly over the next three months, with expectations at their firmest since April 2011, as sterling’s depreciation continues to increase the cost of raw materials.
  • In its second estimate of GDP, the ONS revised up growth for Q4 2016 to 0.7% from 0.6%. The upward revision was largely driven by stronger industrial production. The data points to an acceleration in growth towards the end of last year, and shows that momentum over the second half of 2016 (post-referendum) was stronger than in the first half (pre-referendum). However, the expenditure breakdown of Q4 growth was a bit of a mixed bag: while household spending continued to rise, business investment fell.

While the GDP figures confirm the resilience of the economy post-referendum, the CBI still expects growth to slow over the next couple of years: principally as rising inflation bears down on household incomes and spending, and uncertainty begins to bite harder on business investment.

For further insights into the significance of the above data, or for advice on preparing your business for post-Brexit changes, email me or call me on 020 7099 2621.