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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (until 2pm) and Nick Fletcher

Britain's economy beats forecasts with 0.6% growth in the last quarter - as it happened

Red London buses on Oxford Street.
Red London buses on Oxford Street. Photograph: Photofusion Picture Library / Al/Alamy

European shares end lower

In the US the Dow Jones Industrial Average may have continued to head higher in early trading following Wednesday’s long-awaited breach of the 20,000 barrier, but the picture was less clear in Europe.

Some support was given by Johnson & Johnson’s $30bn deal to buy Swiss biotech firm Actelion, but some mixed results from the likes of Unilever and Sage (badly received) and Diageo (positive) left markets struggling for direction.

In the event only Germany’s Dax managed to end the day in positive territory although the declines elsewhere were limited. In the UK the pound dipped on continuing concerns about Brexit, despite better than expected GDP figures, but the FTSE 100 failed to take advantage. The final scores showed:

  • The FTSE 100 slipped 2.94 points or 0.04% to 7161.49
  • Germany’s Dax rose 0.36% to 11,848.63
  • France’s Cac closed down 0.21% to 4867.24
  • Italy’s FTSE MIB fell 0.73% to 19,439.65
  • Spain’s Ibex ended down 0.38% at 9512.8
  • In Greece, the Athens market added 0.21% to 660.59

On Wall Street the Dow is currently up 28 points at 20,096.

On that note it’s time to close for the evening. Thanks for your comments, and we’ll be back tomorrow.

News that Mexico’s president Enrique Peña Nieto.has called off a proposed meeting with Donald Trump next week as the two side argue about who should pay for the new US president’s infamous wall plan has hit the Mexican currency:

The pound continues to be weaker, slipping back from its six week highs.

Despite the better than expected UK GDP figures, concerns about the evenutal outcome of Brexit have helped push sterling down 0.49% against the dollar to $1.2568. Jasper Lawler, senior market analyst at London Capital Group, said:

The unenthusiastic reaction by currency traders [to the UK GDP figures] reflects a sense that this could be as good as it gets for UK growth. So far the only major fallout from the EU referendum has been the drop in the pound which will inevitably feed through to higher prices and act as headwind to consumer spending.

Markets are forward-discounting mechanisms, and while the growth was faster than expected, it’s already well-understood the much lamented Brexit slowdown never happened. By that token, it’s also evident the Bank of England was completely wrong-footed by the resilience of the UK economy. What’s less clear is the extent to which markets will be self-correcting. If the pound recovers under a more neutral outlook for UK rates, the resulting inflation will not be as strong and not such a headwind to growth.

The data came at time when a rise in political certainty has carried the pound to close to its highest since October’s flash crash. It’s still politics (not economic growth) that is the driving force for sterling.

US home sales drop in December

Another set of US data, this time showing a sharp fall in home sales in December after three months of strong gains.

New single family home sales fell by 10.4% to a seasonally adjusted annual rate of 536,000 units last month, a ten month low. November’s figure was revised up from 592,000 to 598,000.

Economists had expected a fall, but only 1% to around 588.000.

Updated

The positive US service sector figures come after news earlier this week than manufacturing was also performing well in January, and together they point to further Federal Reserve interest rises, said survey compiler IHS Markit. Chris Williamson, its chief business economist, said:

The improvement in service sector business conditions follows the news earlier in the week that manufacturing also enjoyed a bumper start to the year. The two PMI surveys collectively point to the economy growing at an annualised rate of just over 2.5% in January, and puts the US on a strong footing to achieve faster growth in 2017. IHS Markit currently forecasts that the US economy will grow by 2.3% in 2017, up from 1.6% in 2016.

US services
US services Photograph: IHS Markit

Although the strong dollar is hitting exports, domestic demand clearly remains buoyant. Companies reported one of the highest inflows of new business for a year and a half as demand lifted higher at the start of 2017.

Job creation also remained encouragingly solid, and especially impressive given current high overall levels of employment in the economy.

Job gains are linked to increased optimism about the economic outlook. Business expectations of future growth are at their highest for just over one and a half years.

The strong start to 2017 and bullish mood for the year ahead adds to our expectation that we will see the Fed hike rates a further three times in 2017.

US composite PMI and GDP
US composite PMI and GDP Photograph: IHS Markit

The US services sector has performed slightly better than expected in January, according to initial estimates.

Markit’s flash service sector PMI came in at 55.1, up from 53.9 in December and higher than the forecast figure of 54.4. The composite index - which includes services and manufacturing - was 55.4, up from 54.1 in December.

Earlier the advance goods trade balance dipped from -$65.3bn to -$65.

Wall Street opens higher

After Wednesday’s record breaking run for the Dow Jones Industrial Average, which surged through the 20,000 barrier for the first time, US markets have opened the new trading day on a positive note.

The Dow is up 21 points at 20,089 , while both the S&P 500 and Nasdaq Composite have hit new highs, albeit with marginal percentage gains so far.

The moves come despite a mixed bag of company results, with Caterpillar and Whirlpool issuing disappointing numbers but cable operator Comcast and eBay both pleasing the market with their latest updates.

US weekly jobless total rises

Just in: More Americans than expected signed on for jobless benefits last week.

The closely watched Initial Claims figure rose to 259,000 in the seven days to January 21st (the day after Donald Trump’s inauguration), from 237,000 the previous week.

Economists had expected a smaller rise, to 247,000.

The US weekly jobless claims

The number of Americans who remained on unemployment support also picked up. Called the ‘continued claims’ figure, it rose to 2.1 million, from 2.059 million the week before.

Updated

A Caterpillar digger in Las Vegas

Over in America, construction and equipment giant Caterpillar has surprised Wall Street by posting a 13% drop in sales in the last three months.

Caterpillar, seen as a bellwether for global growth, was also cautious about its prospects, warning that the “overall environment remains challenging”.

Updated

Lunchtime summary: UK economy marches on, for now

Time for a recap, with links to the key points in the blog

Britain’s economy has beaten expectations by posting growth of 0.6% in the final three months of last year.

Service sector companies provided the growth, while pharmaceuticals firms helped UK manufacturing to expand. But construction only grew 0.1% and industrial production was flat.

Here are the details:

UK GDP to Q4 2016
The UK has now expanded for 16 quarters in a row Photograph: ONS
UK GDP Q4 2016., the details
The service sector grew by 0.8%, but growth was dragged down by construction and industrial production Photograph: ONS
UK Q4 GDP in detail
Retailers provided the strongest growth Photograph: ONS

The figures are the latest sign that Britain’s economy has not been knocked off course by last June’s EU referendum. GDP growth over the second half of 2016 was faster than in the first six months. Here’s what people are saying about that.

This means Britain was probably the fastest growing G7 economy this year - that will be confirmed once we get GDP from the US, the eurozone, Canada and Japan in the coming days.

However, growth was less impressive on a per-capita basis, adjusting for increases in population. Here are some good charts.

The pound has fallen back from this morning’s six-week highs, and is now trading around $1.256, a fall of 0.5%.

This morning’s decent growth figures should have supported sterling, but instead traders are worrying about Brexit again.

So says Fawad Razaqzada of Forex.com, who writes:

This morning’s UK GDP figures surprised to the upside, yet the pound failed to respond positively to the news as it suffered in a typical “buy the rumour, sell the fact” type of a reaction, except that there were no rumours per se. Sterling has been appreciating noticeably in recent days as traders continued to unwind their Brexit trades – until today.

The economic outlook for the UK remains bleak even if the Brexit vote itself hasn’t had any material impact on the economy yet. The pound would do very well to get back to $1.40s again. The full impact of Brexit will not be felt for months – or even years – but the uncertainty will most likely prevent sterling from appreciating significantly in the interim. So get used to seeing see more chop and churn in GBP for the foreseeable future.

Personal finance experts are urging families to get ready for a financial squeeze in 2017, as higher inflation eats into household incomes.

Hannah Maundrell, editor in chief of money.co.uk says:

“It’s a real relief to see the economy has proved resilient against the Brexit backdrop, this puts us in a solid position to navigate the uncertain year ahead. Households haven’t been scared out of spending by doom and gloom projections of life outside of the EU and this has really helped to push growth forward.

“My biggest concern right now is how households will cope with rising costs over the coming year. Already two thirds of working households say they’re just about managing to make their money stretch and with few having enough savings to back them up, lots of people will feel the pinch. There’s a real risk this could impact growth.

“It’s really worth everyone giving their bank balance a health check now. Knowing how much you have coming in each month, checking where your money is going and looking at how you can make simple savings is the best way to make sure you can cope as life gets more expensive.”

And here’s Calum Bennie, Scottish Friendly’s savings specialist:

The cheaper pound may be bad news for those queuing at the checkout, as rising import costs push up prices, but it provides new opportunities for UK exporters and a boost for the UK tourism industry. We mustn’t let the UK’s strong economic output mask the issues facing Brits up and down the country.

Consumers are already battling rising food, transport and energy costs, and with an interest rate rise also possible in 2017, households will find little comfort in the macro-economic picture.

Even so, people shouldn’t cut back on putting money aside if they can. Building a nest egg and having the comfort of a lump sum to fall back on is invaluable when money starts to tighten.”

Updated

Chancellor Philip Hammond has told City reporters not to expect a thrilling budget in March:

If the Remain Campaign’s warnings had been accurate, this is the day that Britain would have officially entered recession.

But rather than two quarters of contraction, today’s figures show the economy actually grew by 1.2% in the last six months after the EU referendum.

Of course, Britain hasn’t triggered Article 50 yet, let alone actually leave the EU.

But our economics editor Larry Elliott thinks there’s more to it than that:

A better explanation for the robust performance of the economy is that consumers have carried on spending. The factors that underpinned domestic demand ahead of the referendum – low unemployment, rising house prices and rock-bottom interest rates – are still in place. The Bank’s decision to cut rates and to deliver another dollop of quantitative easing in August has, if anything, created even more growth-friendly conditions.

Here’s Larry’s analysis of today’s numbers, following a meeting with Philip Hammond at Microsoft’s HW.

UK was probably fastest growing G7 economy last year

Joanna Partridge of ITV News flags up that Britain probably outperformed its major rivals last year.

US GDP figures are released on Friday, followed by eurozone growth figures next Tuesday.

Updated

Economists worry about 2017 slowdown

Brexit uncertainty is likely to dampen growth this year, according to several City experts, despite the resilient growth in the last three months of 2016.

Here’s Andrew Sentance, senior economic adviser at PwC:

“Strong consumer spending has supported growth over the past three months and this has more than offset the dampening impact of Brexit uncertainty in investment. As a result, the services sector has continued to be the driving force for the UK economy in recent quarters. The world economy has also helped economic growth with positive indicators in all the main economic regions - Europe, North America and Asia.

“2017 will be a more testing year for the UK economy as consumer spending will be squeezed by rising inflation. Despite this, we should expect the underlying resilience of the UK economy and healthy global growth to support economic activity in the year ahead. That should enable GDP to grow by close to 1.5% in 2017 even though Brexit uncertainties will have a dampening effect.”

This is from Ian Kernohan, economist at Royal London Asset Management:

“Far from plunging into recession after the vote to leave the EU, the UK was actually the fastest growing G7 economy in 2016. GDP grew by 0.6% quarter on quarter in the final three months of 2016, faster than expected. This included strong contributions from consumer-focused activities, business services and finance.

“Looking ahead to 2017, the major question is whether a squeeze on real household incomes, and the impact of Brexit uncertainty on the corporate sector, will be offset by the benefits of cheaper sterling against a stronger backdrop of global economic growth.”

Ms Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, also sees a slowdown this year.

“Challenges abound for forecasters in 2017, but we’d caution against complacency.

Consumers won’t be ramping up spending thanks to rising inflation and sluggish wage growth, and businesses’ appetite to sign off big investments will depend on how they view the progress of Brexit negotiations. There’s every chance that this rate of expansion is the high point for the next couple of years

Jo Michell, economics lecturer at Bristol Business School, is worried that consumers are relying on borrowing:

Several people are pointing out that there’s no sign that Britain’s vote to leave the EU has hurt the economy (yet anyway).

This is from Alan Clarke of Scotia Bank:

The first 6 months since the Brexit vote have seen growth of almost 2.5% annualised, which is above trend. Clearly, life goes on, despite the Brexit vote.

There isn’t an awful lot of detail in the breakdown at this stage. But what we do have shows that services output continues to do all the heavy lifting, while construction output remains the problem child of the UK economy.

Here’s columnist Matthew Lynn:

Dr Gerald Lyons, former advisor to Boris Johnson, reckons the EU vote - and the interest rate cut by the Bank of England - actually helped the economy.

Here’s journalist and BBC presenter Andrew Neil:

But.... Ranko Berich, head of market analysis at Monex Europe, believes a slowdown is coming:

“The latest retail sales data shows a slowdown in spending, and inflation is only just beginning to bite. Businesses now also have a clearer picture of the path of Brexit, so investment behaviour is likely to change in 2017.

“This all adds up to a potential slowdown in the economy this year - the Bank of England’s gloom about the economic consequences of Brexit could well prove justified in the end, despite the cheery tone of this morning’s data.”

Matt Whittaker of Resolution Foundation is tweeting some interesting GDP charts.

This shows how the recovery since the 2008 crash has been much slower than earlier recessions, on a GDP-per-capita basis (growth divided by population).

But overall, Britain has done better than its European rivals:

Listen: Kennedy on GDP's shortcomings

Here’s a recording of Bobby Kennedy’s famous speech on the problems with GDP, from 1968.

Bobby Kennedy: GDP measures everything in short, except that which makes life worthwhile.

TUC General Secretary Frances O’Grady is worried that workers will suffer in 2017, if wages don’t keep pace with inflation:

“Our economy may have been resilient in the face of the Brexit vote, but GDP growth is stuck in the slow lane. And people are still feeling the financial crisis in their pockets.

“This isn’t a time for government complacency. 2017 will be a challenging year, so ministers can’t let us sleep walk into another living standards crisis.

“Working people mustn’t be forced to pay the price for Brexit. March’s budget must set out a plan to boost wages, and seriously invest in developing our infrastructure and public services.”

The 0.7% jump in manufacturing output last quarter is mainly due to a large rise in the erratically performing pharmaceuticals industry.

Economist Rupert Seggins flags up that Britain’s service sector has been dominant for decades now:

Hammond: UK economy remains strong and resilient

Chancellor Philip Hammond has welcomed today’s growth figures, but warned that the economy still faces uncertainty.

He says:

“Every major sector of the economy grew last year, which is further evidence of the fundamental strength and resilience of the UK economy. There may be uncertainty ahead as we adjust to a new relationship with Europe, but we are ready to seize the opportunities to create a competitive economy that works for all.”

Hammond is visiting Microsoft’s HQ in Reading to discuss the economy, so we should hear more from him later...

Digging into the GDP report, we can see that Britain’s retail sector was fastest growing part of the economy.

That’s a worry, as it suggests the UK is still reliant on consumer spending (often on imports) rather than a strong manufacturing base.

And if households do cut back in 2017, retail will take a hit.

UK GDP: the details

Darren Morgan, the head of GDP at the ONS, says Britain’s economy ended last year with “steady growth”.

“Strong consumer spending supported the expansion of the dominant services sector and although manufacturing bounced back from a weaker third quarter, both it and construction remained broadly unchanged over the year as a whole.”

Britain’s economy has now enjoyed four years of uninterrupted growth.

It is now 8.7% higher than its pre-crisis peak in 2008. But on a per capita basis (adjusted for population changes), it’s only 1.9% larger.

UK GDP
UK GDP Photograph: ONS

Britain’s manufacturing sector grew by 0.7% during the last quarter, nearly as fast as the services sector.

GDP: The key points

Britain’s service sector drove growth in the last quarter, expanding by 0.8%, while construction and industrial output lagged behind (again).

Here’s the key points from today’s GDP report:

  • Growth during Quarter 4 was dominated by services, with a strong contribution from consumer-focused industries such as retail sales and travel agency services.
  • Following falls in Quarter 3 (July to Sept) 2016, construction and production provided negligible positive contributions to GDP growth in Quarter 4 2016.
  • UK GDP was estimated to have increased by 2.0% during 2016, slowing slightly from 2.2% in 2015 and from 3.1% in 2014.
  • GDP per head was estimated to have increased by 0.4% during Quarter 4 2016 and by 1.3% during 2016.

On an annual basis, the UK economy grew by 2.2% in the last quarter - stronger than the 2.1% growth expected.

UK GDP FIGURES RELEASED

Breaking: Britain’s economy expanded by 0.6% in the final three months of 2016.

That’s stronger than the 0.5% expected by City economists.

It matches the growth in the July-September, and shows little sign of any Brexit impact on the UK economy.

Five minutes to go!

Economists have already warned that the UK economy will slow in 2017, even if last year ended on a high note.

The fall in the pound will drive up inflation thus year, eating into household disposable income and ultimately meaning slower growth, according to some City experts.

More here:

A man walks through the City of London.

Over in the City, drinks giant Diageo said it had benefited from the slide in the pound against the US dollar and the euro since the Brexit vote.

It is estimated to have boosted net sales by about £1.4bn and operating profits by £460m in the year to 30 June. The maker of Johnnie Walker whiskey and Smirnoff vodka toasted a 28% rise in first-half operating profits to £2.06bn and hiked its interim dividend by 5%. Diageo’s shares rose 4.8% on the news.

Unilever fared less well. Its shares slid more than 4% after the Anglo-Dutch consumer giant posted lower-than-expected sales growth of 2.2% for the fourth quarter. It blamed Brazil’s weak economy along with India’s move to withdraw high-value rupee notes to fight corruption.

Unilever’s chief financial officer Graeme Pitkethly told Reuters that its European prices were starting to move up again after price deflation in many countries – partly due to price hikes pushed through in the UK to counteract impact of the weaker pound on the company’s costs. The price rises led to a public spat with Tesco last year, known as Marmitegate.

Why GDP has its problems

We shouldn’t forge that GDP is a somewhat flawed measure - notable for what it omits, as well as what it includes.

GDP is calculated by adding up all the money spent and earned in an economy, and the value of the goods and services produced. That gives a measure of the size of the economy, which you can divide by the population total to get GDP per capita.

But it doesn’t include, for example, unpaid work by carers. It doesn’t consider the environmental damage caused by economic growth. Inequality isn’t factored in, nor is the fact that the Internet means we now get many services for free, where once we paid for them.

In short, it doesn’t show if life is better or worse.

Presidential candidate and New York senator Robert Kennedy greets supporters in 1968.
Presidential candidate and New York senator Robert Kennedy greeting supporters in 1968. Photograph: JP Laffont/Publicity image

Bobby Kennedy summed GDP up wonderfully in 1968, three months before he was assassinated, when he said:

It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.

It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.

It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.

Updated

Britain’s service sector makes up almost 80% of the economy; this chart from Bloomberg shows how it has provided most of the growth in the last three years:

Pound rises ahead of growth figures

Sterling has hit a new six-week high, as traders await the UK GDP figures in an hour’s time.

One pound is now worth $1.266, its highest level since 14 December.

The Treasury have published a guide to GDP:

It concludes that:

GDP matters because it shows how healthy the economy is

Rising GDP means the economy is growing, and the resources available to people in the country – goods and services, wages and profits – are increasing.

Analysts at RBC Capital Markets predict that the UK economy ended 2016 in solid shape, after a wobble in October.

News on economic output was very weak for October (the service sector aside) but the November story saw a reversal for the production sector at least.

Together with strong survey evidence for December that prompted us recently to revise up our Q4 GDP growth forecast to 0.5% q/q as a robust contribution from the service sector is expected once again.

Today’s GDP figures may show if the prospect of a ‘hard Brexit’ has hurt the economy.

The fourth quarter of 2016 began with prime minister Theresa May pledging to trigger Article 50 by the end of March 2017, and making immigration control a top priority.

Kathleen Brooks of City Index says:

We should remember that the prospect of a ‘Hard Brexit’ only raised its head in October, so there could be an even larger decline in business investment in the final three months of the year

Although this may have no bearing on growth right now, it is likely to impact GDP levels and confidence levels at some point in 2017, so a sharp decline in this figure is worth noting.

The agenda: It's UK GDP day!

Good morning.

It’s time for another healthcheck on the UK economy, as we press on towards triggering Article 50 and leaving the EU.

At 9.30am, new GDP figures will be released showing how Britain performed between October and December 2016.

This was a busy time, dominated by the Brexit debate and Donald Trump winning the US election. Did this drama and uncertainty hit the economy, or were consumers and businesses undaunted?

Economists are expecting another quarter of solid growth, with GDP expanding by 0.5%. That would be a slight slowdown on the 0.6% recorded between July and September, but well away from the the recession some predicted if Britain voted to leave the EU.

UK GDP over the last decade
UK GDP over the last decade Photograph: ONS

Today’s figures are only preliminary, so we won’t get too much information about the state of the economy. But it will give a breakdown by sector, so we can see if the service sector continued to drive growth, and whether manufacturers are being helped by the weak pound.

Also coming up today:

Stock markets are expected to rise, after the US Dow Jones index smashed through 20,000 yesterday.

A television screen shows the headline for the Dow Jones Industrial Average surpassing the 20,000 mark following the closing bell on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 25, 2017. REUTERS/Brendan McDermid
A television screen on the New York stock market last night Photograph: Brendan Mcdermid/Reuters

Daily Mail and General Trust, Unilever, Sky, Whitbread, Jimmy Choo and Diageo are all reporting results.

There’s also a flurry of excitement in the City as Royal Bank of Scotland announces it’s setting aside another £3.1bn to cover the cost of misselling toxic bonds. Will it never end?....

Updated

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