United Kingdom GDP Q2 2017

United Kingdom

United Kingdom: Growth remains meager in Q2, despite a slight uptick

August 24, 2017

The British economy expanded at a fairly feeble pace in the second quarter of the year, according to comprehensive data released by the Office for National Statistics (ONS) on 24 August. The economy grew 0.3% quarter-on-quarter in Q2, matching analysts’ expectations and barely above Q1’s 0.2% qoq growth, but still markedly slower than the pace up until the end of 2016. In annual terms, GDP grew 1.7% in Q2, down from Q1’s 2.0%. The UK’s fairly lackluster performance is in stark contrast to that of economies across Europe, many of which have picked up speed since the start of the year. The UK’s expansion in the second quarter was half the EU average, a sharp reversal of fortunes for an economy which had grown accustomed to consistently outpacing growth on the continent in recent years.

Looking at GDP by expenditure, a poor showing from private consumption dragged down the overall figure. Growth in private consumption was all but snuffed out (Q2: +0.1% qoq; Q1: +0.4% qoq) by the combination of higher inflation, weak nominal wage growth and pessimistic consumer sentiment. Lower consumer spending on transport, as a result of changes to Vehicle Excise Duty (VED) which came into force in April, also contributed to the disappointing reading. Fixed investment performed relatively well in Q2, growing 0.7% qoq (Q1: 1.0% qoq), although this was driven by greater public investment. Business investment, in contrast, stagnated, with greater business investment in buildings offset by a drop in investment in transport. Heightened uncertainty generated by Brexit negotiations is likely playing a role in firms’ reluctance to part with their cash. Government spending grew a robust 0.6% qoq in Q2 (Q1: 0.7% qoq).

On the external front, exports grew at a solid pace in the second quarter, aided by the favorable tailwind of a weaker currency (Q2: +0.7% qoq; Q1: -0.7% qoq). Imports also rose a solid 0.7% (Q1: +1.7% qoq). As a result, the net contribution of the external sector improved from minus 0.8 percentage points in Q1 to 0.0 percentage points in Q2.

Looking ahead, the economy is likely to continue growing at a mild pace going forwards. With inflation set to rise further and approach 3.0% towards the end of the year, households will continue to be squeezed. If the deterioration in consumer sentiment observed since the election proves lasting, this could further dampen private consumption, while heightened political uncertainty relating to the development of Brexit negotiations will likely deter investors. In addition, government spending won’t pick up the slack, as Chancellor Philip Hammond remains committed to paring back the budget deficit.

According to Azad Zangana, Senior Economist at Schroders, “Overall, the latest figures are as expected, highlighting the weakness in the economy post the Brexit referendum. We forecast some improvement in the second half of the year as inflation starts to abate, but we doubt growth will return to above trend levels for at least a year. This suggests that employment growth should slow, and the unemployment rate may start to rise.”

The Central Bank expects the economy to expand 1.7% this year and 1.6% in 2018. FocusEconomics panelists expect GDP to expand 1.6% in 2017 and 1.3% in 2018.

Author:, Economist

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United Kingdom GDP Chart

UnitedKingdom GDP Q2 2017 1

Note: Quarter-on-quarter changes of seasonally adjusted GDP and year-on-year variation in %.
Source: Office for National Statistics (ONS) and FocusEconomics Consensus Forecast.

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