Three months of overwhelmingly good news on the economy were topped off with the Bank of England’s new forecasts.
Growth in 2017 is now expected to be 1.4 per cent, almost twice as fast as the monetary policy committee (MPC) thought back in August. So what has driven such a turnaround in prospects for next year?
Uncertainty was the driving force behind the slowdown predicted by most forecasters. Undoubtedly there still is a lot of uncertainty about the future, about our relationship with the EU and what that might mean for Scotland’s relationship with the rest of the UK. But we now know that different parts of the economy have reacted to this uncertainty since the vote.
Take the housing market. The MPC expected to see a steep fall in people taking out mortgages in the months following the referendum, as nervousness crept into the property market. Instead mortgage approvals in September were barely a couple of percent below their pre-referendum levels. People who wanted to move house have continued to do so and haven’t let politics get in the way.
Businesses have been pragmatic about their plans too. The MPC still expects investment to fall, though by much less that previously thought. In the meantime though lending to businesses is up, to both large and small firms. So companies are clearly still confident enough to borrow money.
But it is the consumer that’s been the star of the show. Spending by shoppers in Scotland was up by 3 per cent in Q3. It appears the referendum result had far less bearing on people’s spending patterns than a fine summer of sport.
All this good news added up to GDP growth of 0.5 per cent last quarter, faster than the MPC was expecting even before the referendum. The implication therefore is that most parts of the economy are dealing with uncertainty much better than forecasters had feared. We’ll be starting 2017 with stronger confidence and a more robust housing market than had previously been assumed.
Yet that pace of growth may not last long. Uncertainty has had its greatest impact on the foreign exchange markets. Sterling’s weakness means that the prices of imports are rising and so inflation is expected to rise above the MPC’s 2 per cent target next year.
Higher inflation will sap people’s real spending power, unless pay growth does something spectacular in the next 12 months. So the consumer’s star role in keeping growth going could fade in 2017. That erosion of real income growth is what drives the Bank of England’s expectations for a slowdown next year, albeit a much milder hit than had been imagined.
But the message to take away from the MPC’s new forecasts is one of resilience. We know very little about the Brexit negotiations, but that fact is less troubling to most parts of the economy than we’d feared. Let’s hope that lasts.
• Sebastian Burnside is senior economist with Royal Bank of Scotland