Yahoo Finance Inflation puts the brakes on Britain's economic activity
Britain’s economy cooled considerably in the first three months of the year as higher inflation put a squeeze on disposable incomes, official figures are expected to show this week.
The economy shrugged off the shock of the Brexit vote last June and has been surprisingly resilient, with growth rates of 0.5% in the third quarter of 2016 and 0.7% in the final quarter.
But in a turn of fortunes, City economists are forecasting a tough year ahead, with a sharp slowdown in growth to 0.4% between January and March. This would be the weakest performance since the first quarter of 2016, when the economy grew by 0.2%. The Office for National Statistics is due to publish its initial estimate for first quarter GDP on Friday.
Brexit and the health of the economy will form a central part of the general election campaign waged in the run-up to the snap poll on 8 June. The work and pensions minister, Damian Green, said on Sunday that the Conservative party’s election manifesto would focus on the Brexit negotiations and domestic concerns such as strengthening the economy.
The negative effects of sterling’s slide since the EU referendum appear to be outweighing the positive effects – a boost to exports. The weaker pound has raised the cost of imported materials and pushed inflation to a three-year high of 2.3%.
This meant that real wages – adjusted for inflation – fell in February for the first time in two and a half years, even though unemployment continues to drop and vacancies are at record levels.
Howard Archer, the chief European and UK economist at consultancy IHS Markit, said: “Following the likely marked first quarter slowdown, we suspect that 2017 will become even more challenging for the UK economy – and particularly for consumers as their purchasing power is squeezed harder still.”
He expects GDP growth to be limited to 1.6% this year, with inflation rising to 3% by the end of the year. Economists do not expect the general election to change the economic outlook for this year – assuming the Conservatives are re-elected with an increased majority.
Consumer spending has been strong and the main driver of UK economic growth, but economic surveys and the latest retail sales figures suggest spending started cooling markedly at the beginning of this year as shoppers felt the pinch from rising prices. Retail sales, which account for about a third of household spending, dropped 1.4% between January and March, the biggest quarterly fall in seven years.
Confidence among consumers weakened in the first quarter, according to the latest Deloitte consumer tracker, which polled 3,000 people in mid-March. It dipped to -7% from -6% in the fourth quarter. Four of the six measures that make up the confidence index recorded negative movements, with inflation rising and discretionary spending falling.
People’s confidence in their own disposable income remaining at current levels fell by three percentage points to -17% in the quarter, its lowest level in more than two years. Spending on essential items remained strong at 12%, but spending on discretionary items returned to negative territory, falling by four percentage points to -4%.
Ben Perkins, the head of consumer research at Deloitte, said: “With less disposable income, consumers will have to consider whether to trade down, buy less or borrow more. Consumers are already showing signs of moving away from making major purchases and this is a trend that is likely to continue.”
Chris Hare, UK economist at Investec, said: “While the weaker pound is probably beginning to provide some boost to net exports, the negative impact on household spending power via higher imported inflation is beginning to bite discernibly. Indeed, the inflation squeeze is material: as an average over the quarter, CPI inflation climbed to 2.1% year-on-year in the first quarter versus 1.2% in the fourth quarter.”
Other countries will also release preliminary estimates for GDP at the start of the year on Friday. The US, the world’s largest economy, is likely to have slowed sharply to an annualised growth rate of about 1% in the first quarter. France is forecast to have grown at a 0.4% quarterly rate, similar to the UK, while Spain is expected to have maintained stronger growth, of 0.6%.
The International Monetary Fund last week revised up its UK growth forecast to 2% for 2017, which would make it the second fastest-growing advanced economy after the US. The Washington-based institution said it would take longer than expected for the negative effects of the Brexit vote to materialise. It expects growth to slow to 1.5% next year, a touch slower than previously forecast.
