UK Economy grows 0.5% and raises 2017 forecasts

November 3, 2016

The UK economy posted 0.5% growth in the third quarter, the first full three-month period following the EU Referendum vote. This significantly exceeded economists’ estimates of 0.3%.  While the economy slowed from the second quarter, the ONS reported that there was very little evidence of a pronounced negative effect in the immediate aftermath of the vote. The growth was once again supported by the dominant services sector, which grew at a rate of 0.8%. The construction, manufacturing and industrial sectors all detracted from the headline figure, further skewing the balance of the economy towards services. Overall, the results were positive and received well by investors, however, there are concerns that the risks have merely been pushed out into the future.


UK gilt yields have been steadily rising following the initial rally in government bonds during July. This has been on the back of inflation concerns, driven by fuel and food prices as well as the sterling currency shock. The rise in yields has been particularly prominent at the longer end of the curve, while short-term bonds have been anchored by the historically low-interest rate. This has had the favourable result of steepening the yield curve and will begin to improve the situation for banks and pension funds. However, the fixed income market remains volatile, with quantitative easing and international investors continuing to influence market direction.


Further good news has come from the US, with the world’s largest economy growing at an annualised rate of 2.9% in the three months to September, beating analysts’ estimates of 2.5%. This is an acceleration from a rate of 1.4% in the second quarter. The rate was boosted by businesses replenishing stock after running down inventories in the previous quarter. Consumer spending slowed slightly, however, this has been partially put down to concerns over the upcoming presidential election. Stronger than expected growth in the economy will encourage the Federal Reserve to raise interest rates by the New Year.


Index Open Close Change % Change
FTSE 100 7020 6996 -24 -0.34%
S&P 500 2141 2126 -15 -0.70%
Dax 10710 10696 -14 -0.13%
Cac 40 4536 4548 12 0.26%
Nikkei 225 17184 17446 262 1.52%
UK 10 Year Gilt Yield 1.06 1.248 0.188 17.74%


US non-farm payrolls and the Federal Reserve interest rate decision will be announced this week along with the Bank of England rate decision on Thursday.