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British Pound Sheds Value on News UK Economy Shrank in April

Pound Sterling reacted negatively to data out Monday that shows the UK economy shrank 0.4% in April 2019 according to the latest set of monthly growth data from the Office for National Statistics.

Markets had been expecting a disappointing reading, although not by this margin, as the estimate by economists was for a decline of 0.1%.

The disappointment corresponded with a fall in the Pound-to-Euro exchange rate from 1.1250 to 1.1225, while the Pound-to-Dollar exchange rate fell from 1.2718 down to 1.2695.

We were not anticipating much of a reaction to the data by Sterling, however it appears the scope of the disappointment could not be ignored by foreign exchange markets.

The ONS report that while the economy shrank 0.4% in April, it grew 0.3% in the three months to April.

“GDP growth showed some weakening across the latest 3 months, with the economy shrinking in the month of April mainly due to a dramatic fall in car production, with uncertainty ahead of the UK’s original EU departure date leading to planned shutdowns,” says Rob Kent-Smith, Head of GDP at the ONS. “There was also widespread weakness across manufacturing in April, as the boost from the early completion of orders ahead of the UK’s original EU departure date has faded.”

Separate data released by the ONS shows the manufacturing sector contracted 3.9% on a month-on-month basis in April, where forecasts had suggested the market was eyeing a shallower decline of -1.1%.

Industrial production meanwhile contracted 2.7% in April where markets were expecting contraction of 0.7%.

The disappointing data heaps further pressure on Sterling which is already struggling under the yoke of political uncertainty with the Conservative Party’s leadership race now fully underway and suggesting that the likely winner will only see success if they are open to courting a ‘no deal’ Brexit.

Pound Dollar

Above: The clear reaction by Sterling against the Dollar to the GDP data release.

GDP and Pound Euro

Above: The clear reaction by Sterling against the Euro to the GDP data release

“Sterling though has clearly been unwilling to completely write off the weakness, perhaps also concerned that the drop in industrial sector output is a sign of some of the disruption that could be to come, if the UK were to face a very disorderly Brexit. Indeed, Sterling has fallen to stand at $1.2685 against the USD, from around $1.2725 before the data,” says Victoria Clarke, an economist with Investec.

Bank of England financial modelling suggests under a ‘no deal’ Brexit there would be a negative hit to the UK economy and a substantial readjustment lower in the value of the Pound.

The economic statistics out Monday will serve as a reminder to currency traders and investors that the UK faces significant economic vulnerabilities over coming months due to ongoing political uncertainty.

Responding to the data, James Smith, Developed Markets Economist at ING Bank, says the slippage in UK economic activity in April “is almost entirely down to a Brexit-related correction in manufacturing.”

The outlook for the economy going forward remains difficult says Smith:

“The wider growth story continues to look fairly bleak. While consumer spending may be a little stronger given the modest improvement in real wage growth, investment is likely to continue falling over the summer as Brexit uncertainty weighs on decision-making.”

Expectations for further uncertainty on the horizon is expected to ensure the Bank of England opts to keep interest rates unchanged for the remainder of the year.

“Rising concerns about a possible ‘no deal’ Brexit, as well as the growing likelihood of a general election in the autumn, make it more likely that the central bank remains on hold through this year,” says Smith.

For Sterling, an interest rate rise – in response to rising wages and inflation – would have offered a rare source of support as currencies tend to rise when their central bank is raising interest rates.

However, it now looks as though the UK’s resilient economy might no longer offer the support the Pound has come to rely on over recent months.

John Hawksworth, Chief Economist at PwC, says the UK should however avoid recession and see modest growth over coming months:

“After a strong first quarter, GDP fell back sharply in April due to planned car factory shutdowns and the reversal of stockbuilding before the original Brexit date.

“Looking through these temporary fluctuations, underlying growth in the UK economy remains modest as Brexit-related uncertainty continues to weigh on business investment. Modest growth seems likely to continue through the summer and autumn, bearing in mind also the drag on business confidence from rising global trade tensions.”

rolling three month GDP growth

PwC reckon robust consumer spending courtesy of continued jobs growth and rising real earnings over the past year, as well as increased government spending, should buoy the economy.

“Balancing these positive and negative effects, we expect UK GDP growth to remain modest, averaging around 0.2% per quarter over the rest of the year,” says Hawksworth.

Written by Gary Howes

Source: Pound Sterling Live

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Sluggish economic growth to continue as demand for lending falls

The UK economy’s sluggish growth shows no signs of letting up, with all three major lending classes set to grow less than two per cent this year, new figures have revealed.

Despite an uptick in real incomes, demand for consumer credit is forecast to grow just 1.6 per cent this year and two per cent in 2020, the lowest rate of growth since 2013, according to the EY Item Club.

Mortgage lending will also remain stagnant, rising less than one per cent, as consumer confidence and a lack of supply continues to hit the property market.

Meanwhile, continued uncertainty around Brexit means business lending is expected to grow only 1.3 per cent this year, as businesses hit pause on major investment plans.

The sluggish forecast across lending classes is a best-case scenario based on a Brexit deal being reached by 31 October. Growth would be even lower if the UK were to crash out of the EU without a deal, according to EY.

“The weak economic outlook continues to hold back demand for lending,” said Omar Ali, EY’s UK financial services managing partner.

“It’s been a similar story for over a decade now and there’s little improvement in sight. Since the financial crisis, the expectation was that the economy would return to higher growth after a short period of sluggishness – this has never materialised and is not forecast to happen any time soon.”

It comes amid a slowdown in growth across the wider UK economy, which grew 1.4 per cent last year, its slowest rate since 2009. GDP growth is forecast for just 1.3 per cent this year, rising marginally to 1.5 per cent in 2020.

By James Warrington

Source: City AM

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UK business confidence remains negative

The ICAEW Business Confidence Monitor (BCM) suggests that GDP growth could drop from 0.5% in Q1 to 0.2% in Q2, due to the impact of stock building, which “probably temporarily boosted GDP”.

“Businesses I speak to say that there is no sense that things will change much in the next few months and this is reflected in their confidence. Many have stockpiled ahead of the expected March exit from the European Union, but this did not happen. Stockpiling is expensive for businesses, but it did boost GDP growth,” said Michael Izza, ICAEW chief executive.

“However, my fear is that this will have an impact on growth and GDP figures in the rest of the year, so we should not be surprised to see even lower growth than normal while companies use up the excess stock they now have,” added Izza.

Stock building of raw materials and components is most widespread among businesses in the manufacturing sector.

Business confidence remains negative (-16.6) but has not fallen sharply for the first time in year. Transport and storage (-26.7) and property (-26.1) are the least confident sectors, according to the BCM.

Sales growth has been “slow and steady” and is predicted to remain so for the year. Employment is also growing slowly, said ICAEW.

By Raymond Doherty

Source: Economia

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UK economy to lose 3.5 percent of GDP in no-deal Brexit – IMF

Britain will suffer economic damage equivalent to the loss of at least 2-3 years of normal growth between now and the end of 2021 if it leaves the European Union without an exit deal, the International Monetary Fund warned on Tuesday.

The world’s fifth-biggest economy could quit the EU as soon as Friday, disrupting its ties with the bloc that it joined 46 years ago, if Prime Minister Theresa May cannot agree a delay with EU leaders on Wednesday.

The IMF said that even in a relatively orderly no-deal Brexit scenario — with no delays at borders and minimal financial market turmoil — the economy would grow 3.5 percent less by the end of 2021 than it would under a smoother Brexit.

“The increase in trade barriers has an immediate negative impact on UK foreign and domestic demand,” the IMF said.

The EU economy would suffer too but by much less than Britain, facing an estimated 0.5 percent hit to gross domestic product compared with a smooth Brexit scenario, the IMF said.

British exports to the EU and other countries which have trade deals with the bloc would face new tariffs and regulatory barriers if Britain reverted to the World Trade Organisation rules favoured by some Brexit supporters.

Supporters of an abrupt Brexit have accused the IMF of making politically motivated forecasts in the past.

In its report on Tuesday, the fund said a worse-case no-deal Brexit scenario involving border delays and financial market turmoil would increase the damage to about 4 percent of GDP by 2021.

The forecasts took into account the British government’s plans not to impose tariffs on most categories of imports in the event of a no-deal Brexit, and also assumed that the Bank of England would cut interest rates.

BoE Governor Mark Carney gave broadly similar estimates of the cost of a no-deal Brexit last month, when he said preparations by government and businesses could mitigate only some of the damage of a no-deal Brexit.

A spokesman for Britain’s finance ministry said the government wanted to leave the EU with a deal but was getting ready for a possible no-deal Brexit.

The IMF downgraded its forecast for economic growth in Britain this year to 1.2 percent from a forecast of 1.5 percent it made three months ago, which would be the weakest since 2009.

Growth for 2020 was seen picking up to 1.4 percent, but in both years Britain’s economy was predicted to grow less than the euro zone, in contrast to before the 2016 Brexit referendum.

“The downward revisions … reflect the negative effect of prolonged uncertainty about the Brexit outcome, only partially offset by the positive impact from fiscal stimulus announced in the 2019 budget,” the IMF said.

The BoE should take a “cautious, data-dependent” approach to monetary policy, it added.

Reporting by David Milliken; Editing by William Schomberg

Source: UK Reuters

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UK economy to lose 3.5 percent of GDP in no-deal Brexit – IMF

Britain will suffer economic damage equivalent to the loss of at least 2-3 years of normal growth between now and the end of 2021 if it leaves the European Union without an exit deal, the International Monetary Fund warned on Tuesday.

The world’s fifth-biggest economy could quit the EU as soon as Friday, disrupting its ties with the bloc that it joined 46 years ago, if Prime Minister Theresa May cannot agree a delay with EU leaders on Wednesday.

The IMF said that even in a relatively orderly no-deal Brexit scenario — with no delays at borders and minimal financial market turmoil — the economy would grow 3.5 percent less by the end of 2021 than it would under a smoother Brexit.

“The increase in trade barriers has an immediate negative impact on UK foreign and domestic demand,” the IMF said.

The EU economy would suffer too but by much less than Britain, facing an estimated 0.5 percent hit to gross domestic product compared with a smooth Brexit scenario, the IMF said.

British exports to the EU and other countries which have trade deals with the bloc would face new tariffs and regulatory barriers if Britain reverted to the World Trade Organisation rules favoured by some Brexit supporters.

Supporters of an abrupt Brexit have accused the IMF of making politically motivated forecasts in the past.

In its report on Tuesday, the fund said a worse-case no-deal Brexit scenario involving border delays and financial market turmoil would increase the damage to about 4 percent of GDP by 2021.

The forecasts took into account the British government’s plans not to impose tariffs on most categories of imports in the event of a no-deal Brexit, and also assumed that the Bank of England would cut interest rates.

BoE Governor Mark Carney gave broadly similar estimates of the cost of a no-deal Brexit last month, when he said preparations by government and businesses could mitigate only some of the damage of a no-deal Brexit.

A spokesman for Britain’s finance ministry said the government wanted to leave the EU with a deal but was getting ready for a possible no-deal Brexit.

The IMF downgraded its forecast for economic growth in Britain this year to 1.2 percent from a forecast of 1.5 percent it made three months ago, which would be the weakest since 2009.

Growth for 2020 was seen picking up to 1.4 percent, but in both years Britain’s economy was predicted to grow less than the euro zone, in contrast to before the 2016 Brexit referendum.

“The downward revisions … reflect the negative effect of prolonged uncertainty about the Brexit outcome, only partially offset by the positive impact from fiscal stimulus announced in the 2019 budget,” the IMF said.

The BoE should take a “cautious, data-dependent” approach to monetary policy, it added.

By David Milliken

Source: UK Reuters

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UK economy ‘losing £600m because of Brexit every week’

Brexit has cost the UK economy £600 million a week since the referendum, and the shock of a no-deal divorce could hammer the country even harder.

A new report published by investment banking giant Goldman Sachs suggests that, since the June 2016 vote, nearly 2.5 per cent has been shaved off GDP.

It argues that, had UK voters opted to remain, the economy would have been in a much stronger position, instead of underperforming and lagging behind other advanced economies.

Goldman’s number crunchers concluded that investment has been one of the biggest casualties of the Brexit debacle, confirming official data which has shown it in decline.

“The component-level breakdown reveals that output losses have been concentrated in investment and private consumption,” they said.

“The outsized impact on investment suggests that political uncertainty associated with the Brexit process may, indeed, be one of the major sources of the economic cost of Brexit.”

The report echoes Bank of England analysis that suggested around £40 billion per year, or £800m a week, of lost income for the country as a whole since the result of the leave vote.

Goldman added that under a no-deal scenario, favoured by the most extreme Tory Brexiters, the UK will be a big loser, but its European neighbours would also suffer.

It said: “Under our ‘no-deal’ scenario, the UK suffers large output losses, in conjunction with a substantial global confidence shock marked by a sharp sterling depreciation. European countries would be most exposed to this scenario and could see output losses of around 1 per cent of real GDP.”

Conversely, a “status quo” Brexit transition deal would reverse part of the UK’s output underperformance and, under a remain scenario, the UK “fully recoups Brexit-related output costs and business confidence rebounds”.

Separate figures yesterday showed Brexit stockpiling helped fuel a surge in manufacturing output last month as firms sought to avoid being caught short ahead of what was supposed to be Britain’s departure from the EU.

The Markit/CIPS UK manufacturing purchasing managers’ index showed a reading of 55.1 last month compared with the 52.1 recorded in February. It represents a 13-month high and beat expectations from economists, who forecast a reading of 51.2. A figure above 50 indicates growth.

Rob Dobson, director at IHS Markit, which compiles the survey, said: “Output, employment and new orders all rose as manufacturers and clients raced to build safety stocks. Stocking of finished goods and input inventories surged to new survey-record highs.”

Source: Scotsman

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UK Economy Roars Back to Life in New Year with Strong GDP Beat

– UK economy rebounds with a bang in January as GDP rises 0.5%.

– Rebound more than offsets -0.4% decline seen back in December.

– And may be enough for markets to keep faith with BoE rate hike bets.

The UK economy rebounded from its December slump early in the New Year, according to Office for National Statistics (ONS) figures released Tuesday, and momentum behind the recovery could be enough to ensure financial markets keep faith with hawkish bets about Bank of England (BoE) interest rate policy.

The UK economy grew by 0.5% in January, which more than reverses the -0.4% decline seen back in December, when markets had been looking for only a 0.2% increase in the New Year.

All main sectors of the economy contributed to growth during the January month, with the exception of agriculture, although the standout performer was the construction sector which saw output rise by 2.8%. However, that simply reverses a -2.8% decline from December.

“The larger than expected monthly increase in GDP of 0.5% in January (consensus 0.2%) is a reassuring sign that, up until January at least, the UK economy was weathering the political crisis at home and slowdown overseas pretty well,” says Andrew Wishart, an economist at Capital Economics.

“The rebound in GDP in January, after December’s 0.4% month-to-month drop, is a timely reminder that the PMIs aren’t a reliable indicator of the economy’s momentum when political uncertainty is elevated,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Tuesday’s report comes after IHS Markit PMI surveys of the services, construction and manufacturing sectors suggested strongly that the economy ground to a halt in January.

Those PMI surveys continued to point toward economic stagnation after ONS data revealed the December GDP contraction, leading to increased speculation that the economy had hit a rough patch just as the March 29, 2019 Brexit day appeared on the horizon.

ONS figures for January show the economy rebounding resolvedly from its December trough but the UK economic picture painted by Tuesday’s numbers is entirely different when viewed over a longer horizon, because GDP grew by just 0.2% for the three months to the end of January.

Above: Sectoral contributions to UK GDP growth on a three-month basis.

Quarterly growth was led by a robust expansion in the services sector but the increase was unchanged from the 0.2% pace of growth seen in the final quarter of 2018 and takes the shine off of Tuesday’s headline.

On a three-month basis the services sector expanded by 0.38% while output from the construction sector declined -0.04% and output from the industrial sector fell -0.12%. However, economists say the pace of growth in the January month alone could be more important for the outlook than the three-month number.

“January’s increase in GDP exceeded even our top-of-the-range 0.4% forecast, so we are revising up our forecast for quarter-on-quarter growth in Q1 to 0.3%, from 0.2%. This implies that little, if any, excess capacity will open up in the first half of the year, giving the MPC little time to delay another rate hike if, as we expect, GDP growth regains some momentum once a Brexit deal has been signed off,” says Tombs.

Tuesday’s data follows a year in which UK GDP grew by just 1.4% after the economy expanded by 0.2% in the final quarter, 0.6% in the third quarter, 0.4% in the second quarter and just 0.1% in the first quarter. That was the weakest expansion since 2012, and one that many economists have attributed to uncertainty over the Brexit process.

First quarter GDP growth has tended to be weak in recent years and given the performance of the economy in 2018, expectations for the New Year period in 2019 have been particularly downbeat. But some economists are telling their clients that Tuesday’s figures could mean this year is different.

“There is no denying that today’s figures suggest the economy is weathering the Brexit storm remarkably well,” says Wishart of Capital Economics. “Of course, the data may deteriorate in February and March if Brexit has caused consumers and firms to reach for the handbrake. But note that even if monthly GDP growth is zero in February and March, the economy would still grow by 0.4% in Q1. As a result, we are happy to stick with our 0.3% q/q forecast.”

UK economy

Above: UK GDP growth trends.

Currency markets care about the GDP data because of what it might mean for Bank of England interest rate policy. Rising demand within an economy can often mean increased inflation pressures, and it is changes in the consumer price outlook that dictate BoE interest rate decisions.

The BoE has raised rates by 25 basis points on two occasions since the referendum in 2016, taking the Bank Rate up to 0.75%, and it’s said repeatedly in recent months that elevated inflation and a robust outlook for consumer price pressures mean it’ll need to keep raising rates in the coming quarters.

However, pricing in the overnight-index-swap market implies a BoE bank rate of just 0.81% for December 19, 2019, which is just 6 basis points above the current cash rate and suggests strongly that investors have only limited appetite for betting on a BoE rate hike coming this year.

The actual Bank Rate that would prevail if the BoE were to hike again is 1%. As a result, there is significant scope for investors to price-in BoE policy action for 2019, which would be positive for Pound Sterling exchange rates if such a thing were to happen.

Many economists say a deal facilitating an orderly exit of the UK from the EU would be enough to persuade the BoE to come off the sidelines and lift its interest rate again.

By James Skinner

Source: Pound Sterling Live

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UK economic growth slowed in fourth quarter

UK economic growth slowed in the final quarter of last year as car manufacturing declined at its steepest rate in just under a decade.

Gross domestic product (GDP) growth fell to 0.2% between October and December, according to the Office for National Statistics (ONS).

This compares to 0.6% growth in the previous quarter, when warm weather and the World Cup contributed to a boost in economic activity.

Meanwhile, annual GDP increased by 1.4%, the weakest it has been since 2009.

Sterling tumbled following the news, dropping 0.4% versus the US dollar to 1.28. Against the euro, the pound was down 0.1% at 1.14.

But Prime Minister Theresa May’s official spokesman said: “The UK economy continues to grow and remains fundamentally strong.”

Car production was down 4.9% in the period, marking the biggest decline since the first quarter of 2009.

Total production output slipped by 1.1%, the largest decline since the end of 2012. This included a 0.9% dip in manufacturing.

Construction was also lower, dropping 0.3% in the fourth quarter. This follows two consecutive quarters of growth during the summer, when companies caught up with work delayed by adverse weather early in the year.

Although services output was up, growth slowed to 0.4% following a relatively strong performance during the summer.

UK economic growth
(PA Graphics)

The ONS said it reflected a slowdown across a number of industries, as Brexit-related concerns weighed on business-to-business spending at the end of 2018.

Speaking about the impact of a potential no-deal Brexit on the economy, Chancellor Philip Hammond told ITV: “Business is challenged, I accept that, but we can’t convey information that we don’t have. We don’t know how some of our partners on the other side of the channel will behave in the event of no-deal Brexit.

“My judgement is that we are likely to get the (Prime Minister’s) deal through Parliament but I can’t be 100% certain, and that is why we are doing the contingency planning we are doing. Once businesses have clarity, they will invest again.

“No deal would be a very bad outcome for economy,”

Rob Kent-Smith, head of GDP at the ONS, said: “GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow with the health sector, management consultants and IT all doing well.

“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy.”

Compared with the same quarter in 2017, the UK economy is estimated to have grown by 1.3%, the weakest in six years. It was last weaker in the second quarter of 2012.

On a month-to-month basis, GDP fell 0.4% in December. This was the biggest monthly drop since March 2016.

Howard Archer, chief economic adviser at EY Item Club, said the figures were “disappointing”.

“The UK economy clearly changed down into a much lower gear in the latter months of 2018 as heightened economic, political and Brexit uncertainties fuelled business caution in particular,” he said. “There are also signs of consumers becoming more cautious despite a pick-up in their purchasing power.”

Samuel Tombs of Pantheon Macroeconomics warned against interpreting the data as evidence of an impending recession.

He said: “On the face of it, the sharp fall in GDP in December looks alarming, but it isn’t unprecedented — it also fell by 0.4% in March 2016 — and it was driven by sectors which have historically been volatile.”

Separately, the ONS data dump showed that Britain’s total trade deficit widened slightly in the last three months of the year by £900 million to £10.4 billion, due to a rise in goods imports including cars and chemicals.

Source: BT

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Disappointing end to 2018 for UK economy could be confirmed this week

A disappointing end to 2018 for the UK economy could be confirmed by official GDP figures later this week, analysts have warned.

Last week the closely-followed IHS Markit/ CIPS Purchasing Managers’ Index (PMI) revealed a three-month low in UK construction sector activity in December and a 29-month low in job creation in the services sector.

But the manufacturing sector posted a near-record increase in stock holdings in December.

Economists predicted a 0.1 per cent rise in GDP for November, when the Office for National Statistics release figures on Friday – it would leave the UK on track for the lowest GDP rise since 2009.

“We think that a repeat of the previous month’s modest 0.1% expansion in the size of the economy is likely,” Martin Beck, analyst at Oxford Economics, said.

Beck added that while a composite measure of PMIs in November dropped to the lowest level since July 2016, it would be offset by a strong performance in the retail sector and upbeat industrial data for the month.

The research firm also expected GDP to rise 0.3 per cent in the fourth quarter to leave 1.4 annual growth – the lowest since 2009.

Daiwa Capital Markets also said last week’s PMI data implied “minimal growth” in the final quarter of the year and predicted GDP growth of 0.1 per cent in November, unchanged from October, but on track for a “sharp slowdown” from the 0.6 per cent growth in the third quarter.

The investment bank’s analysts also expected manufacturing and construction output to be stronger for November than the previous month but a slowdown in services activity.

They said: “The manufacturing and construction PMIs, released the past couple of days, provided a mixed picture of business sentiment at the end of the year.

On the whole, however, we took a downbeat message from them, not least as the boost to manufacturing activity mainly reflected stock building ahead of a possible no-deal Brexit.”

Source: City A.M.

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UK economy grows but business investment falls for third consecutive quarter

The UK economy grew at its fastest rate in almost two years in the three months to September but business investment fell for the third consecutive quarter.

GDP grew by 0.6 per cent in the third quarter, the Office for National Statistics said today, confirming its initial estimate last month.

But the longer term picture remain “subdued” it said, with business investment dropping 1.1 per cent to £46.9bn.

It is the first time investment has dropped over three consecutive quarters since the economic downturn of 2008 to 2009.

The UK’s current account deficit widened by £6.6bn to £25bn (4.6 per cent of GDP) in the three months to the end of September – the largest deficit since the third quarter of 2016.

The widening was down to increased profits from British companies flowing to foreign investors.

EY Item Club economist Howard Archer said: “The further, marked rise in the current account deficit is disappointing as an elevated shortfall is a potential source of vulnerability for the UK economy – particularly if there was any major loss of investor confidence in the UK for any reason such as Brexit concerns.”

ONS figures also showed that borrowing in November was £7.2bn, the lowest November borrowing for 14 years and £900m less than the same month last year.

GDP growth was led by the services sector, while construction and manufacturing also contributed to the growth.

Household spending also increased 0.5 per cent, the eighth consecutive quarters in which households have spent more than they received.

Head of national accounts at the ONS Rob Kent-Smith said: “Today’s figures confirm the economy picked up in the third quarter with a solid showing from services and construction.

“However, the longer-term picture remains subdued and business investment has now fallen for three consecutive quarters.

“Households continued to spend more than they received, for an unprecedented eight quarters in a row.”

Source: City AM