UK: Resilient for now – ING

James Knightley, Senior Economist at ING, suggests that the UK GDP components held up well in 1Q16, but ING see downside for consumer spending and business investment in 2Q16 on Brexit worries.

Key Quotes

“UK 1Q16 GDP was unrevised at 0.4% QoQ in yesterday’s update, but the YoY rate was nudged down marginally to 2% from 2.1%. Previously, we only had the industry breakdown, which continues to show that the service sector is driving the economy forward. Both construction and production industries continue to languish with output below levels from 10 years ago when adjusted for inflation.

This updated report gave us the first look at the expenditure detail and it showed a strong performance by consumer spending (+0.7%), while investment rose 0.5% and government spending increased 0.4%. However, there was a big drag from net trade with exports falling for the second quarter in three (split by a 0.1% QoQ rise in 4Q15) while imports rose.

It looks as though 2Q16 GDP growth will be weaker (we forecast growth of around 0.25% QoQ) given the downturn in business surveys and consumer confidence due to Brexit related uncertainty. Assuming the UK votes to stay an EU member we should get a decent bounce in activity in 2H16, mainly felt in 4Q as we suspect it will take time for corporates to fully commit to new hiring and investments. If not (the UK leaves) then recession will look an increasing possibility with sterling and interest rates set to fall sharply as businesses and households retrench and foreign investors take flight.”