UK economy slowdown worse than feared as sales fall

UK sales volumes jumped 2.3% last month, but rising inflation is putting the squeeze on consumers. Picture: Ian Georgeson
UK sales volumes jumped 2.3% last month, but rising inflation is putting the squeeze on consumers. Picture: Ian Georgeson
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The UK economy endured a worse-than-expected slowdown in the first three months of the year as sliding retail sales and a jump in living costs took their toll on growth.

The Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.3 per cent in its initial estimate for the first quarter of 2017, down from 0.7 per cent in the fourth quarter of last year.

A bit of belt tightening would put growth on a more sustainable footing

Sebastian Burnside

Howard Archer, chief UK and European economist at IHS Global Insight, said today’s figures, which represent the slowest expansion since the first quarter of 2016, when growth was 0.2 per cent, marked a “significant dent” to UK economy’s resilience.

• READ MORE: Cost of living fears mount as inflation hits 2.3%

He added: “Following the marked first-quarter slowdown, we suspect that 2017 will stay challenging for the UK economy – and particularly for consumers as their purchasing power is squeezed harder still.

“We expect GDP growth to be limited to 1.6 per cent in 2017 – this is a below consensus forecast, but the poor first-quarter performance reinforces our jaundiced view on the economy. We do not expect the snap general election on 8 June to materially change the economic outlook for this year, assuming that the Conservatives are re-elected with an increased majority.

Economists had been expecting the economy to cool as consumers tightened their belts in the face of rising inflation, but they had pencilled in a growth reading of 0.4 per cent.

The ONS said the main driver behind the slowdown was a sharp decline in the dominant services sector, which saw its growth more than halved to 0.3 per cent, down from 0.8 per cent in the final three months of last year.

It added: “There were falls in several important consumer-focused industries, such as retail sales and accommodation; this was due in part to prices increasing more than spending.”

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Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “Rising inflation and slow wage growth have dampened consumer demand and reduced retail spending, which were helping drive growth last year after Britain’s vote to leave the EU. On the other hand though, the increased attractiveness of sterling in the wake of the referendum has boosted manufacturing and international exports, making headway in rebalancing the UK economy.

“With the general election just around the corner and Brexit negotiations afoot, any dip in the economy risks bringing further caution and uncertainty to businesses, which has a knock-on effect when it comes to investment and employment. However the Chancellor, with better-than-expected Budget tax receipts in his pocket, has room for manoeuvre and should be able to pre-empt any further slowdown, which should help with business confidence.”

GDP comment from Royal Bank of Scotland

The UK economy grew by just 0.3 per cent in the first three months of 2017, writes RBS senior economist Sebastian Burnside. What should we make of this slowdown?

It’s certainly slow. Slower than the 0.5 per cent expected by the Bank of England. Slower than the 0.7 per cent the UK managed at the end of last year. But it also might just herald a more sustainable pace, given the challenges facing the economy.

In the nine months since the Brexit vote, the economy is now 1.5 per cent bigger. That growth has been uneven. The strength seen in Q4’s 0.7 per cent expansion has been offset by the 0.3 per cent recorded at the start of this year. So overall, growing at an average pace of 0.5 per cent a quarter is very respectable.

But a slowdown is already with us. Inflation is now matching wage growth, meaning the purchasing power of people’s pay packets has stopped growing.

The most obvious sign of this weakness is on the high street. Spending by shoppers has stagnated after an especially strong final three months of 2016. Rising prices have meant they’re actually taking even less home in real terms than they were before Christmas. The ONS thinks that this alone knocked 0.1 per cent off GDP growth.

Slower consumer spending might actually a good thing. Borrowing through personal loans and credit cards is rising at around 10 per cent a year.

Households actually spent £5.8 billion more than they earned in Q4 last year. Neither of these trends can last forever. A bit of belt tightening would put growth on a more sustainable footing.

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