Written by John Benjamin from Orbex

The British economy grew strongly than previously anticipated in the third quarter with no signs of a slowdown from the June’s Brexit referendum. Data released on Friday by the UK’s Office for National Statistics (ONS) showed that the final revised GDP for the three months ending September rose 0.6%, beating economist expectations. This was higher than the previous two revisions which showed a 0.5% increase during the quarter.

The third quarter GDP shows signs of stability as the UK’s economy posted a quarterly growth rate of 0.3% and 0.6% in the first and second quarters of this year. The first quarter GDP growth rate was revised lower by 0.1 percentage points. Despite the upbeat print, the underlying data showed that there were no signs yet of a weaker exchange rate boosting exports, which is a cause for caution.

The third quarter GDP confirmed that the UK’s economy has been expanding for the 15th consecutive quarter. On a year over year basis, growth was however revised to 2.2%, down from 2.3% previously.

Industrial output fell by 0.4% during the quarter while construction output fell 0.8%, unchanged from the previous revisions. Services sector continued to drive growth, rising 1.0% revised higher from 0.8% as reported previously.

UK Quarterly GDP: 0.6%, Q3 2016 (Source: ONS)

On the contrary, data showed a worse than expected picture as far as trade and growth was concerned which is seemingly relying more on domestic demand than previously thought. Darren Morgan, a statistician from ONS said “Robust consumer demand continued to help the UK economy grow steadily in the third quarter of 2016.”
The latest revised figures showed that net trade posted a drag of nearly 1.2 percentage points during the quarter which was incidentally the largest since early 2012. This was also larger than the previous estimates which showed an increase of 0.7% to the GDP.
The ONS also released the current account details which showed a deficit of 25.494 billion pounds which was more than the second quarter’s 22.079 billion pounds. The current account led to a deficit increase of 5.2% of the GDP, up from 4.6% and is seen within reach of the 6% deficit last seen in late 2013.
The gross fixed capital formation rose 0.9% on the quarter while business investment was also seen advancing 0.4%.
The British pound was actually muted to the data as the cable fell to test the technical support at 1.2250 – 1.2224 few hours after the release of the revised GDP figures.
The British economy has so far weathered the Brexit outcome, but with the UK still part of the EU, the real effects of Brexit will likely be felt once the Article 50 is triggered which could happen as early as March 2017. This means that there is a real risk of a slowdown in the UK’s economy from the second quarter of 2017 depending on how the negotiations proceed.

UK Headline economic indicators (Source: ONS)

Investors will be focusing on the Bank of England’s monetary policy as inflation continues to accelerate. The data from ONS showed that the real household disposable income had actually fallen 0.6% during the third quarter of the year, for the first time since Q2 2015. So far the UK’s wage growth has been fairly resilient to the Brexit effects, but with rising inflation things could change soon if wages fail to rise at the same pace.

For the moment, the declines in the British pound looked to have carved out a temporary bottom. By Friday’s trading GBPUSD was seen trading near the $1.22 region. Thin trading volumes ahead of the holiday week is however likely to result in some erratic moves in prices on low liquidity but the near term outlook for GBPUSD remains flat.