It looks like the UK has bounced back from its economic slump — but it is still headed for its worst year since the financial crisis

A woman holds a Union flag umbrella in front of the Big Ben clock tower (R) and the Houses of Parliament in London October 4, 2014.

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A woman holds a Union flag umbrella in front of the Big Ben clock tower (R) and the Houses of Parliament in London October 4, 2014.
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REUTERS/Luke MacGregor

  • UK economy looks to have bounced back strongly from its start of the year slump over the summer.
  • The strong data, however, masks the likelihood that the economy will revert back to type for the rest of the year.
  • That’s according to Ruth Gregory, senior UK economist at Capital Economics.

The British economy may finally have gotten itself out of the deep rut it entered at the end of 2017, but it still looks to be headed for its worst year since the financial crisis in terms of pure economic growth.

Figures from the Office for National Statistics likely expanded 0.7% in the three months up to August. Having grown at a sluggish 0.2% per quarter in the first half of the year, the ONS’ data suggested that things finally picked up over the summer.

This was thanks largely in part to an incredibly un-British streak of hot weather, and an even more uncharacteristic run by the England football team during the World Cup. The two events in tandem increased retail sales, boosted the amount Brits spent in restaurants and pubs, and in isolation, the weather allowed for greater productivity in the UK’s construction sector.

After several quarters of worryingly slow growth – which themselves were impacted by particularly poor weather – it finally looks, on the surface at least, that the UK economy may be recovering just in time for Britain to face the economic hit of leaving the European Union.

Unfortunately for the UK, however, research house Capital Economics is inclined to believe that the pick up will ultimately be short lived, and that growth in 2018 will be the lowest since 2010, when Britain was just emerging from the depths of the financial crisis.

“We doubt that the recent improvement will last, for a few reasons,” Ruth Gregory, senior UK economist at Capital Economics said in a note to clients on Friday.

“Overall, we have not changed our view that GDP growth this year as a whole will come in at 1.3% – the slowest annual rate since the crisis.”

Gregory lays out three separate reasons to believe that the summer’s strong growth is destined to simply be a brief positive in an otherwise negative trend:

  1. Much of the big boost in the summer was, as mentioned, down to the World Cup and the warm weather. Now both of those crutches have been removed, things are likely to go back to their pre-summer state. “A number of temporary factors, such as a bounce in high-street spending and ‘catch-up’ growth in the construction sector, boosted activity and should be reversed,” Gregory wrote.
  2. The summer’s growth spurt actually masked the fact that the “fundamental drivers” of the British economy – those which have kept growth so subdued since the referendum – are little changed. “Admittedly, Bank of England Chief Economist Andy Haldane commented in a speech this week that there are signs of a ‘new dawn breaking in pay growth,'” Gregory wrote. “But with inflation on the up again, the improvements in households’ spending power have been small.”
  3. Finally, she says, the uncertainty over Brexit will have an even more obvious negative impact on growth as the March 29 deadline approaches. “Brexit uncertainty – which we estimate has knocked 0.5ppts or so off business investment since the referendum – will probably get worse before it gets better,” she said. “While there is a decent chance that Theresa May will clinch a Brexit deal (perhaps next week), we are less optimistic about the prospects of it gaining Parliamentary approval.”