Philip Hammond said the “incredible market share war” between supermarkets over the past few years would help to curb shop price rises and support consumer confidence, as he signalled that growth in 2017 could outpace official forecasts.
It came as data published by the Office for National Statistics showed the UK economy grew by 0.6 per cent in the final three months of 2016, matching the expansion in the previous quarter.
This is faster than the 0.5 per cent growth predicted by economists and compares with the Treasury’s dire predictions ahead of the EU referendum that a vote to leave the bloc would trigger a year-long recession.
Thursday’s figures mean the economy expanded by 2 per cent over the year.
While Britain is the first G7 nation to report fourth-quarter growth figures, International Monetary Fund estimates suggest that growth in Germany and the US, which are expected to have expanded by 1.7 per cent and 1.6 per cent respectively last year, will not outpace the UK.
Mr Hammond said he believed that the current subdued levels of business investment would “come back and mak[e] a significant contribution” to growth as the country’s future trading relationship with the EU became clearer.
The fall in the value of the pound since the Brexit vote has pushed up import costs and is likely to drive up inflation, which rose to 1.6 per cent in December 2016.
Paul Polman, the boss of consumer goods giant Unilever, which was locked in a price row with Tesco last year, warned on Thursday that keeping prices at previous levels was “unsustainable”.
He said “many more” companies would seek to increase prices in the coming months.
However, Mr Hammond said the battle between the supermarket giants for customers, which had also “fought off the assault” by German discounters Lidl and Aldi, reflected Britain’s “highly competitive economy”.
“[This] is of course very good news for the consumer and moderates the way in which some of those price increases get passed through into the economy,” Mr Hammond told reporters on a visit to Microsoft’s offices in Reading.
“I think there are… some big question marks over how those inflationary pressures feed through to consumers and I think the evidence so far is that there has been quite a dampening effect. Many people would have predicted that the impact of sterling depreciation would have come through much more quickly.”
Mr Hammond noted that the UK’s annual growth rate of 2 per cent was slightly below the Office for Budget Responsibility’s forecast for 2.1 per cent growth in 2016, but suggested its growth forecast of 1.4 per cent could be too pessimistic if consumer spending remains robust.
The Chancellor said he expected businesses to continue investing in the UK.
“What I’m sensing at the moment is that there are a lot of business decisions that are just being paused because people don’t have to make them right now and common sense is telling them that if they can wait a bit they will wait to see what happens,” he said.
The ONS fourth quarter growth figures showed the expansion was led by the UK’s dominant services sector, which grew by 0.8 per cent.
Manufacturing, which drives around 10 per cent of UK output, grew by 0.7 per cent, while construction output rose by 0.1 per cent.
Alan Clarke, an economist at Scotiabank, said the figures showed “life goes on, despite the Brexit vote”.
Mr Clarke expects the UK economy to expand by around 1.6 per cent this year. “If we are going to be wrong, we think it is that we may have been too pessimistic,” he said.