UK economy slows more than expected in first quarter of 2017

Higher prices due to the weakness of the pound since the EU referendum led to slower UK economic growth than initially expected in the first three months of the year and highlighted how British shoppers are seeing their spending power fall, reports The Financial Times.

Growth was revised down to 0.2 per cent in the first quarter from 0.3 per cent in the first estimate, driven by a bigger than expected slowdown in consumer services, according to figures from the Office for National Statistics.

The economy grew 0.7 per cent during the final three months of 2016. The ONS said the distribution, hotels and restaurants sector and retailers slowed growth in the first quarter of this year and this was partly because of higher prices.

As employment continued to grow in the first three months of the year — 122,000 jobs were added — the new estimate of economic growth suggests that productivity fell more than the initial estimate of a 0.5 per cent decline in output per hour published last week.

“This is the first time in a year that UK growth failed to outpace that of the euro area,” said George Buckley, UK economist at Nomura. “While UK real [national income] is broadly the same as that of Germany relative to where it was at the start of 2008, Germany has produced its 8.5 per cent increase in aggregate output over that period with no change in its population, compared with a 6 per cent rise in UK headcount.”

Economists had expected that consumer spending would slow this year as higher oil prices and more expensive import costs began to be passed on to shoppers at a time of low wage growth.

But the timing of Easter may also have been a factor in the slowdown. Official figures for April, published last week, showed retail sales bounced back during the month and the latest survey of purchasing managers suggests the services sector regained momentum during the month.

The latest purchasing mangers’ index from Markit found the services sector grew at its fastest pace this year in April.

“There’s a strong likelihood that growth will pick up in the second quarter, but whether robust growth can be sustained further ahead remains highly uncertain,” said Chris Williamson, chief business economist, IHS Markit.

Sterling traded briefly above the $1.30 mark in the run-up to the data, but was unable to hold the closely watched level after its release. In afternoon trade, the pound was down 0.1 per cent at $1.2965. It reached a day-high of $1.3012, which represented a rise of 0.3 per cent.

The FTSE 100 was 0.1 per cent higher at 7,523.71, encouraged by a record closing high for Wall Street’s S&P 500 overnight. The rise, led by financial stocks, took the main London index back towards its own record high of 7,533.70, set on May 16. The FTSE 250, seen as more representative of the domestic UK economy, was up 0.1 per cent at 19.962.90.

In the first quarter of 2017, household spending rose 0.3 per cent, less than the 0.7 per cent recorded in the final quarter of 2016.

The latest figures show the fall in the value of the pound since the EU referendum has had a negative effect on the economy, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. Household savings ratios have fallen to a record low as price increases outpaced inflation.

“Households have compromised their ability to fund further increases in spending over the coming quarters, when their real incomes will be coming under even more pressure from high inflation,” he said.

However, investment growth recovered to 1.2 per cent in the first three months of 2017, from 0.1 per cent in the previous quarter.

Business investment, which is roughly half of total investment spending, increased 0.6 per cent after contracting 0.9 per cent in the previous quarter.

Ruth Gregory, UK economist at Capital Economics, said they expect a decrease in imports and an increase in exports and business investment to help offset some of the weakness in consumer spending this year.

“We don’t see any reason why uncertainty should increase over the next two years,” she said, if there is more clarity over the UK’s deal with the EU then that could help reduce uncertainty and boost investment further.

While a strong trade deal would help boost the pound, and therefore provide less of a tailwind to exports, it would also reduce the squeeze on consumers.

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