Comment: Slowdown threatens sunny growth forecasts

Consumer spending is forecast to grow by an encouraging 3 per cent this year. Picture: Jane Barlow
Consumer spending is forecast to grow by an encouraging 3 per cent this year. Picture: Jane Barlow
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OVER the past two months there have been scattered signs that the UK economy is losing momentum. But figures on first quarter performance posted last week showed a much sharper slowdown than most had predicted.

Now comes a Purchasing Managers Report on manufacturing showing activity falling to a seven month low, with a notable fall in business investment.

Uncertainties about the election, and in particular the prospect of a messy and unstable aftermath, could now be hitting business confidence.

If that is the case – and if there is no clear winner, as seems likely this week – this could cast a dark shadow on forecasts of 2.6 per cent growth across the UK this year.

First, those disappointing preliminary first quarter figures for UK GDP. The consensus across economic forecasters had been for a modest slowdown in growth – from 0.6 per cent in the fourth quarter to 0.5 per cent. In fact, growth slowed to 0.3 per cent quarter-on-quarter, the weakest performance since the final three months of 2012 and half the quarter-on-quarter growth rate seen in the previous two quarters.

What’s dragging down the big picture? Growth in the opening months of the year was held back by a marked downturn in construction output and a small dip in industrial production. On top of this, growth slowed appreciably in the dominant services sector.

This was seen expanding by just 0.5 per cent, well down on Q4’s 0.9 per cent growth pace and the weakest reading since Q2 2013. The slowdown was particularly marked in the business services and finance sub-sector which saw no growth at all over the January to March period – the weakest performance since Q4 2010.

The ONS highlighted the downward contributions from financial services and architectural and engineering services.

While there is still every hope that the economy will continue to make progress over 2015 as a whole, this latest snapshot is likely to see some shading down of growth predictions for the year.

Investec says that survey data across the major UK sectors does not suggest the UK is about to suffer a broad loss of growth momentum. “Our latest medium-term forecasts envisage a rebound in the pace of activity over the subsequent quarters and growth of around 2.5 per cent over the year,” it says.

This assessment would appear to be supported by the CBI’s latest Growth Indicator, out today, showing growth in the three months to April holding up at around the average pace since mid-2014. Firms again expect growth to pick up over the next three months, although optimism has continued to decline slightly since the turn of the year.

However, Howard Archer, economist at Global Insight, was quick to trim his 2015 growth forecast from 2.6 per cent to 2.4 per cent.

And this may not be the end of the downward revisions. He points out that his latest forecast assumes a marked pick-up in the second half – on the basis that “a sustainable government emerges from May’s general election political uncertainty wanes”.

And despite all the hand-wringing about “austerity”, the fundamentals still look promising for consumer spending. This is forecast to grow by around three per cent this year, helped by a rising trend in average earnings – currently growing by 1.7 per cent, with inflation set to average 0.3 per cent over the year.

UK export prospects should also be increasingly helped over the coming months by stronger growth in the Eurozone, although sterling’s strength against the euro threatens to limit the upside.

However, Archer adds: “Any prolonged political uncertainty following the general election would be liable to at least temporarily weigh down on growth, particularly through leading to increased business caution over investment.”

And the latest PMI survey on manufacturing will add to these concerns. Specifically, the overall index dipped to a seven-month low of 51.9 in April from 54.0 in March (which had been the best level since July). This points to pretty modest manufacturing expansion given that a reading of 50.0 indicates flat activity.

A striking feature was a fall in the work for investment goods firms in April, echoing other signs that businesses have recently adopted a more cautious approach on investment – likely linked to election uncertainty. That is worrying as robust investment is vital for balanced UK growth and to lifting productivity, which has been worryingly weak.

One crumb of comfort in all this is that the Bank of England is likely to hold off from raising interest rates until the early spring of 2016 as the first quarter growth figures were notably lower than the Bank’s own estimates.

What of prospects in Scotland? The economy here grew by 0.6 per cent in the last three months of 2014, helped by that eyebrow-raising construction boom – output here was up by 6.1 per cent on the quarter and by 13 per cent over 2014 as a whole. Fraser of Allander is forecasting Scottish GVA growth of 2.6 per cent this year with Inverness-based Mackay Consultants at 2.4 per cent.

This would suggest little difference in the performance of the Scottish and UK economies. But, as the think tank Fiscal Affairs Scotland notes in its latest monthly bulletin, the sectors driving this growth have been very different for Scotland versus the UK. “This,” it says, “has been little commented upon or analysed.”

While both Scotland and the UK have seen fast growth in the construction sector, the growth rate in Scotland has been double that seen in the UK (19 per cent over the two years 2012-14 v 9 per cent).

The principal reason this has not led to faster growth overall for Scotland is because the sector covering distribution (retail and wholesale), hotels and restaurants has grown much faster in the UK (8.5 per cent) than in Scotland (3.4 per cent).

“If these figures are correct,” it concludes, “then Scotland’s recent recovery would appear to be dependent on a more slender economic base than the UK’s.” «