UK economy grows more slowly than expected in first quarter 2017

The UK’s GDP growth in the first quarter of 2017 has been unexpectedly revised down to 0.2 per cent, in news that will compound fears that the economy is slowing as the impact of last June’s Brexit vote finally hits home.

City of London analysts had expected no change in the Office for National Statistics’ initial estimate last month of 0.3 per cent growth.

Sterling slid around 0.17 per cent on the day to $1.2953 in the wake of Thursday's data release.

The latest disappointing estimate for GDP growth follows robust growth of 0.7 per cent in the final quarter of 2016 and 0.5 per cent in the quarter immediately following the referendum, when the economy seemed to shrug off the impact of the vote and widespread predictions of a recession.

According to the ONS Q1 2017 is now thought to have been the weakest quarter of growth since the first three months of 2016.

The weakest quarter before that was the final three months of 2012, when the economy contracted by 0.2 per cent.

Slowing down

GDP per capita – which adjusts for population growth – fell to zero in the first quarter.

While the overall economy is now 8.7 per cent higher than its level in 2008 on the eve of the financial crisis, GDP per head is just 1.7 per cent higher after nine years.

Household consumption, which has powered the economy since last year's referendum, is estimated to have expanded by just 0.3 per cent in the first quarter, slowing markedly from the 0.7 and 0.8 per cent growth in the previous two quarters.

Economists believe the sharp spike in inflation, due to the slump in the pound since last June's vote, is hitting disposable incomes and deterring spending.

The ONS said that the downward revision was due to slower than expected growth in the UK's dominant services sector, particularly business services and finance.

However, Samuel Tombs of Pantheon noted that household sector spending growth of 1 per cent was still higher than 0.6 per cent growth in employees' compensation, implying that the savings rate fell again in the quarter.

“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.

Down to zero

Consumer price inflation hit a three and half year high of 2.7 per cent in April, while wages have been growing at a rate of just 2.4 per cent.

Business investment is estimated to have grown by 0.6 per cent in the quarter, following a 0.9 per cent contraction at the end of 2016, and better than the 0.2 per cent expansion analysts had expected.

But the picture on trade was weak. Exports fell by 1.6 per cent in the quarter, despite hopes that the weaker pound would also be a major lift for exporters.

Imports grew by 2.7 per cent, implying net trade was a large drag on overall GDP growth in the three months.

“These latest GDP estimates show that the UK economy cooled significantly in the first quarter of 2017,” said Yael Safin, an economist at KPMG.

“Rising inflation hit consumer spending while manufacturers failed to exploit the benefits of the lower pound. What’s more a strong pick up in investment and higher government spending, were not enough to counter the disappointing exports performance. Early indicators point at a slight improvement in the second quarter, but if that fails to materialise we could see GDP growth as low as 1.5 per cent this year.”