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UK economic slowdown in first quarter 'worse than expected'

The UK economy endured a worse-than-expected slowdown in the first three months of the year as the services sector slackened and inflation hit retailers.

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

Economists had been expecting GDP growth to slow as consumers tightened their belts in the face of rising inflation, but they had pencilled in a higher growth figure of 0.4%.

The ONS said: "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."

Britain's powerhouse services sector, which accounts for 78% of the UK economy, put downward pressure on overall growth after expanding by 0.3% between January and March this year, slowing from 0.8% between October and December of 2016.

The main drag came from the hotels, restaurants and distributions sector, which fell by 0.5%, as increasing prices from rising inflation applied the brakes to retail trade and accommodation services growth.

Output in the construction sector was also dragging on GDP after expanding by 0.2% in the first three months of the year following 1% growth in the fourth quarter of 2016.

Production expanded by 0.3% over the period, with manufacturing increasing by 0.5% thanks to a jump in motor vehicle manufacturing, while agriculture growth eased to 0.3% in the first quarter from 1% in the final quarter of 2016.

It means GDP grew by 2.1% in the first quarter of 2017 compared with the first three months of last year.

This comes as separate figures for the index of services showed output climbed by 0.2% between January and February, following a 0.1% decline between December and January.

Consumers have been feeling the pinch since the beginning of 2017, with inflation sitting at its joint highest level for more than three years at 2.3% in March.

The rise in everyday price tags has been largely driven by the Brexit-hit pound, which has pushed up import prices and costs for manufacturers.

The squeeze on household spending power has been compounded by dismal retail sales, which recorded their biggest fall for seven years in the three months to March.

Sterling was up 0.1% against the US dollar following the GDP announcement, while the pound slipped 0.4% versus the euro.

Andrew Sentance, PwC's senior economic adviser, said the GDP estimate was driven by a slowdown in the domestic economy.

He said: "The sectors which trade actively with the rest of the world - manufacturing and business and financial services - saw quite healthy growth in economic activity in the first quarter.

"But this was offset by a significant decline in output in retailing and other consumer-related services, alongside a small drop in the output of the transport and communications sector.

"This is consistent with the other evidence we have received over the past month: a decline in retail sales, sluggish employment growth and a squeeze on purchasing power from rising inflation."

Bank of England policymaker Michael Saunders said last week that he expects UK economic growth and inflation to outstrip the central bank's previous forecasts.

He said inflation could hit 3% by the end of this year and has predicted GDP to expand by 2% through next year and 2018.

Mr Saunders said the stronger-than-expected growth would be driven by rising business investment and exports, helping to offset the slowdown in consumer spending.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said slowing growth in the first quarter was " not definitive proof that the economy is on the ropes".

However, he said "the pressure on consumers' incomes looks set to build this year as retailers pass on higher import prices; we still expect CPI inflation to exceed 3% in the second half of this year.

"Meanwhile, firms' investment plans remain depressed due to Brexit risk, while the competitiveness of exports has improved only marginally, despite sterling's depreciation, because exporters have hiked prices."

He added: "We continue to expect quarter-on-quarter GDP growth to average just 0.2% over the remainder of 2017."

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