United Kingdom: Economy gets off to a weaker-than-expected start this year
April 27, 2018
The economy started the year sluggishly, according to preliminary data released by the Office for National Statistics (ONS) on 27 April. Quarter-on-quarter growth came in at 0.1% in Q1, down from 0.4% in Q4 of last year and significantly undershooting market expectations of a 0.3% increase. Chancellor Philip Hammond played down the significance of the slowdown, pointing to a strong economy that was hit by exceptional weather conditions in the quarter. However, this contradicted the ONS’s assessment that the effect of snow on growth in Q1—which was the slowest since Q4 2012—was “relatively small”.
Q1’s weaker quarter-on-quarter growth was underlined by the worst performance in the construction sector in nine years—the sector contracted 3.3% in Q1, more than Q4’s contraction of 0.1%. Construction output fell throughout the quarter, not just in the period of adverse weather, indicating that other factors such as Brexit-induced uncertainty also played a part in the sector’s weak performance. The agriculture sector also had a poor showing in Q1, with output falling 1.4% (Q4: -1.1% quarter-on-quarter).
The economy was supported somewhat by services output at the start of this year, which grew 0.3% (Q4: +0.4% qoq). The business services and finance sub-sector was the main driver of services growth in Q1. It was, however, hit by a fall in retail trade in the quarter, which can be partly attributed to fewer petrol sales. Meanwhile, industrial production was solid in Q1, with an increase of 0.7% (Q4: +0.4% qoq). This was primarily due to the Forties oil pipeline—which was offline for several days in Q4—coming back online in the quarter.
This year, the economy is expected to lose some steam. Fixed investment growth is seen softening, particularly as the UK’s future relationship with the EU remains uncertain, despite the approval in March of the draft agreement on its withdrawal from the bloc. Private consumption growth will likely prove mild amid weak consumer confidence and low household savings rates. The external sector should, however, provide some support to the economy thanks to healthy global demand.
UK GDP Forecast
The Central Bank expects the economy to expand 1.8% in both 2018 and 2019. FocusEconomics panelists take a less optimistic view, projecting GDP will expand 1.5% in 2018, which is unchanged from last month’s forecast, and 1.5% again in 2019.
Author: Edward Gardner, Economist