UK economy's best quarter in two years hides loss of momentum

Britain posted its fastest economic expansion in almost two years in the third quarter, but a sudden loss of momentum from August pointed to slower growth in the run-up to Brexit.

Gross domestic product increased 0.6% from the second quarter, the most since the end of 2016, the Office for National Statistics said Friday. The figure was in line with forecasts.

The pickup, from 0.4% growth between April and June, was partly driven by household spending, suggesting searing temperatures and the soccer World Cup in the early part of the quarter played a key role. Net trade also made a significant contribution.

With the Bank of England judging the economy is now operating at full capacity, policy makers are expected to raise interest rates at a gradual pace to keep inflation in check. Traders see the next increase toward the end of next year.

But the need for caution was underscored by monthly figures showing the economy stagnated in both August and September, with the dominant services industry posting a modest contraction. The weakness in September partly reflected slower retail sales and fewer car purchases.

“The economy saw a strong summer, although longer-term economic growth remained subdued,” said Rob Kent-Smith the ONS’s head of national accounts.

The loss of momentum chimes with the latest purchasing- management surveys, which pointed to a sharp deceleration in the final quarter amid weak real wage growth and uncertainty over Britain’s looming exit from the European Union. In a sign that companies are delaying spending decisions, business investment fell for a third consecutive quarter.

Theresa May is striving to unite her warring Cabinet behind a Brexit deal. However, the most contentious issue - how to keep goods flowing freely across the Irish border - is far from being resolved and the prime minister will still need to get any agreement through Parliament, where she faces considerable opposition.

While the economy has rebounded since its snow-blighted start to the year, Britain remains on course to be a laggard among Group of Seven rich nations for a second year in 2018.

Its growth rate has slipped from top of the G-7 rankings prior to the 2016 Brexit referendum to vying with the Italy and Japan at the bottom, with the International Monetary Fund predicting growth of just 1.4% this year and 1.5% in 2019.

Separate trade figures on Friday showed the deficit in goods narrowed to a seven-month low of £9.7bn in September. A smaller shortfall over the third quarter was partly due to lower imports of vehicles as shipments were disrupted by new EU emission standards.

Here are the other highlights from the report:

• Consumer spending rose 0.5% in the third quarter; business investment falls 1.2%.

• Net trade contributes 0.8 percentage point to growth, most since end of 2016, as deficit in goods and services narrows sharply.

• Services, the largest part of economy, increase output by 0.4%; construction gains 2.1%.

•  In September, services fell 0.1%; construction grows 1.7%.

• Manufacturing rises 0.2% on month, but performance is mixed across sectors with car output falling; weaker oil and utility output leaves overall industrial production unchanged GDP rises 1.5% in third quarter from year earlier, around the BOE’s “speed limit” GDP per head rises 0.5% on quarter, up 0.8% on year.

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