United Kingdom: Growth rate drops in Q1 as consumers feel the pinch

According to preliminary data released by the Office for National Statistics (ONS) on 28 April, the UK economy lost steam in the first quarter of the year, as higher inflation and sluggish wage growth hurt consumer spending, which has been vital in propping up the economy since last year’s Brexit vote. The economy expanded 0.3% quarter-on-quarter (qoq) in Q1 (Q4 2016: 0.7% qoq), the slowest pace of growth in a year and undershooting analysts’ expectations.

Looking at the sector-by-sector picture, the all-important service sector, which accounts for around four fifths of GDP, dragged growth down in Q1, recording a mere 0.3% expansion (Q4 2016: 0.8% qoq). Several consumer-facing industries, such as retail trade and accommodation, reported less activity over the quarter, mainly as a result of higher prices denting households’ purchasing power. The manufacturing sector expanded a solid 0.5% (Q4 2016: 1.2% qoq), as export-oriented firms reaped the rewards of weaker sterling, and the production of motor vehicles rose significantly. The British car industry has undergone something of a renaissance in recent years, with output in 2016 the highest in over a decade. Growth in the construction sector dipped from 1.0% in Q4 to 0.2% in Q1.

In annual terms, GDP grew 2.1% in Q1, up from Q4’s 1.9%.

The Central Bank expects the economy to expand 2.0% this year and 1.6% in 2018. This month, FocusEconomics’ panelists have upgraded their GDP forecast for 2017 and the Consensus Forecast now foresees 1.7% growth—up 0.1 percentage points from last month’s estimate. The Consensus Forecast shows GDP expanding 1.3% in 2018.