United Kingdom: Growth rate drops more than anticipated in Q1 as consumers feel the pinch
May 25, 2017
According to comprehensive data released by the Office for National Statistics (ONS) on 25 May, the British economy began to run out of gas in the first quarter, as higher inflation and sluggish wage growth hurt consumer spending, which has been vital in keeping the country’s economic engine ticking over since last year’s Brexit vote. GDP growth was revised down from an initial estimate of 0.3% to a mere 0.2% quarter-on-quarter (Q4: +0.7% qoq), the slowest pace of growth in a year. Annual growth in Q1 was also revised down from 2.1% to 2.0% (Q4: +1.9% year-on-year).
Following a solid performance in 2016, when the economy confounded the doom-mongers by continuing to expand at a healthy rate despite the huge political uncertainty generated by the Brexit vote, the widely anticipated slowdown finally hit in Q1. Consumers found themselves caught in a vice of low nominal wage growth and rapidly rising cost-push inflation as a result of the depreciation of sterling, with household expenditure growth taking a heavy hit as a result (Q1: +0.3% qoq; Q4: +0.7% qoq). Other macroeconomic indicators gave further signs that consumers are hurting, with retail sales growth tapering off in Q1 and house price growth turning negative in March. In contrast, fixed investment perked up following a lackluster end to last year (Q1: +1.2% qoq; Q4: +0.1% qoq). Business investment also rose strongly, particularly in the software data and other machinery and equipment sub-sectors, despite the high degree of uncertainty surrounding the country’s future trading arrangement with the European Union. Over the same period, government consumption rose 0.8% following a flat reading in Q4 2016.
The external sector deteriorated substantially in Q1 and acted as a major drag on the economy, with exports contracting 1.6% quarter-on-quarter, in spite of the boost to firms’ competiveness provided by the weaker pound (Q4: +4.6% qoq). Imports rose 2.7%, contrasting the 1.0% decline recorded in Q4 2016. As a result, the external sector’s net contribution swung from plus 1.7 percentage points in Q4 to minus 1.4 percentage points in Q1.
Looking ahead, with real wage growth having recently turned negative for the first time since 2014, and inflation only set to trend higher this year as the full effects of the currency depreciation kick in, the prospects for consumers look fairly grim. This will likely translate into further sluggish private consumption growth in the quarters ahead. Fixed investment growth should also remain paltry, as firms hold their horses while Brexit negotiations, slated to begin in June, get underway. However, the external sector should pick up from Q2 onwards as firms benefit from improved competiveness, with growth for the economy as a whole set to hover around 0.3% quarter-on-quarter going forward.
Author: Oliver Reynolds, Economist