The UK was the fastest growing economy in the G7 last year and is not yet showing any signs of the slowdown that many economists predicted would follow the vote to leave the EU in June.
The economy grew by 0.6 per cent in the fourth quarter of 2016, according to a first estimate from the Office for National Statistics. Growth for the year as a whole was 2 per cent, slightly slower than the 2.2 per cent figure for 2015.
The preliminary estimate for the fourth quarter was above the consensus forecast of 0.5 per cent growth and there were no revisions to the second and third quarter figures.
“Strong consumer spending supported the expansion of the dominant services sector and although manufacturing bounced back from a weaker third quarter, both it and construction remained broadly unchanged over the year,” said Darren Morgan, head of GDP at the ONS.
Welcoming the figures, Philip Hammond, the chancellor, said he believed there were signs that the positive effect from sterling’s depreciation on demand for British exports is outweighing the negative effects expected to come from rising inflation.
“What we have already seen is a slower pass through rate of currency-driven inflation pressure than many people predicted,” said Mr Hammond. He said the “highly competitive” nature of the UK’s retail market left “question marks” about how much retailers would pass rising costs on to consumers: “I think the evidence so far is that there has been quite a damping effect.”
But Simon Kirby, of the National Institute of Economic and Social Research, said it was “too early” to judge the effects of the weaker pound.
The new GDP figures show growth at the end of last year was driven by the services sector, which grew by 0.8 per cent. Services make up 79 per cent of the UK economy.
Consumer-focused industries such as retail sales and travel agency services performed particularly well. The output of travel agencies expanded by 7.3 per cent in the fourth quarter.
The manufacturing sector also grew strongly, expanding by 0.7 per cent and reversing much of the contraction of the third quarter. This was mainly because of changes in production of pharmaceuticals, which can be volatile.
But overall industrial production was dragged down by a sharp contraction — of 6.9 per cent — in mining and quarrying output, partly because of the temporary shutdown of the Buzzard oilfield in the North Sea.
Total industrial production was unchanged from the previous quarter, construction output grew by just 0.1 per cent and agricultural production increased by 0.4 per cent. All three sectors had contracted earlier in the year.
“The economy’s brisk growth at the end of 2016 has all the hallmarks of being driven by an unsustainable consumer spending spree,” said Samuel Tombs of Pantheon Macroeconomics.
“Consumers appear to have turned to debt to spend more.”
According to figures published by the British Bankers’ Association on Thursday, consumer borrowing continued to rise in December, but Rebecca Harding, BBA chief economist, said: “There are early indications that 2017 could see softer demand for credit from business and households, as they anticipate future interest rate rises and wait for further clarity on Brexit.”
Andrew Sentance, a former Bank of England Monetary Policy Committee member who now works for PwC, expects growth to slow to 1.5 per cent this year, saying: “2017 will be a more testing year for the UK economy as consumer spending will be squeezed by rising inflation”.
The ONS produces its first estimate of GDP more quickly than most other statistical agencies. But it does so with only 40 per cent of the required data and the preliminary figure is subject to revision.
Updated estimates of GDP growth, along with a breakdown by categories of expenditure and income, will be published over the next two months.
Additional reporting by Gavin Jackson
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