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At a 0.5% rate, the preliminary estimate of the third quarter GDP represents a deceleration after the 0.7% increase in Q2. However, the latest number was above our, consensus and Bank of England staff expectations for a more modest increase. The year-on-year rate of growth rose a touch to 2.3%.
GDP growth was heavily dependent on the services sector in Q3, where growth was stronger than we had expected - at 0.8% in the third quarter compared to our forecast of 0.5%. Industrial production, by contrast, fell 0.4% and construction fell 1.4%. Looking more closely at the services sector, compared to the previous quarter, strength was particularly concentrated in the transport, storage and communication sector. The other source of upward surprise came from government services. The fact that the upside surprises were concentrated, rather than dispersed, helps to leave us comfortable in expecting further slowing in coming quarters and further again in 1Q 2017. The forecast of a further slowing reflects the impact of post-referendum uncertainty and an assumption that higher inflation will dampen consumer spending growth.
What are your thoughts on the ‘Brexit' at this point?
The probability of ‘harder Brexit' has risen, in our view, and the Sterling weakness, although supportive of exports, may hit confidence and increase pass-through into inflation, which could erode consumer resilience. Further ahead, we see a potentially extended period of underperformance of the UK economy, while the exit negotiations and related uncertainty persist.
What are your forecasts for GBP/USD and EUR/GBP by the end of this year?
Our forecast for the EUR/GBP stands at 0.98 by the end of the fourth quarter this year, while we anticipate the GBP/USD currency pair to trade at 1.21.