Rising inflation leads to downgrade in UK growth

Official ONS figures put GDP growth in the first three months at 0.2 per cent, down from initial estimates of 0.3 per cent, and a marked fall from the 0.7 per cent rise in the last quarter of 2017.Pressure on household spending by rising inflation saw areas of the services sector, such as retail and accommodation, suffer, although business services and finance continued to grow strongly.The downgrade means that the UK’s growth equalled that of the US and Italy in the first quarter, while France expanded by 0.3 per cent, Japan by 0.5 per cent, Germany by 0.6 per cent and Spain by 0.8 per cent. The eurozone and the EU as a whole both grew by 0.5 per cent.The ONS said, “Consumer-facing industries such as retail and accommodation fell and household spending slowed. This was partly due to rising prices. Construction and manufacturing also showed little growth, while business services and finance continued to grow strongly.”John Hawksworth, chief economist at PwC, expressed concern at the sharp slowdown in the UK, although he saw some reason for optimism in ONS data showing a rise in business investment and higher government spending.

Rising prices

“Today’s GDP data indicate that the economy slowed even more than previously estimated in the first quarter of 2017, as consumer spending power was squeezed by rising prices,” he said.“Excluding population growth, real GDP per head – the broadest measure of living standards in the economy – flatlined in the first quarter.“Estimated GDP growth in Q1 was revised down from 0.3 to 0.2 per cent and further detail was released confirming that the slowdown was focused on consumer spending and related industry sectors, such as retailing, hotels and restaurants, transport and communications.”Lee Hopley, chief economist at the manufacturers’ organisation EEF, said it was clear economic growth was suffering because of the squeeze on real wages from rising inflation, currently estimated at 2.7 per cent.

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Sluggish household spending

“While the downward revision may have been unexpected, the reasons behind the weakness surely aren’t. Sluggish household spending growth, a consequence of the squeeze on real incomes starting to kick in, and some pull back on export growth after an impressive end to last year,” she said.“We expect the consumer weakness to persist as wage growth falls further behind rising prices, but there should be some turnaround on the trade front, driven by a brighter outlook in the rest of the world. For those on the hunt for some good news in the data, it was to be found in the investment numbers.“Business investment picked up at the start of this year and some big revisions to investment at the end of last year mean the investment picture isn’t as dire as first thought. Still, we’ll need to see this rebound continue and strengthen for longer-term productivity prospects to improve.”Ian Stewart, chief economist at Deloitte, added, “Just as expected, higher inflation is squeezing incomes and spending. High inflation is hitting consumers, but a weak pound and a recovering global economy are helping businesses. UK growth is likely to tilt away from the consumer towards exports, manufacturing and investment this year. This should keep the UK economy growing at a similar rate to last year.”For related news and features, visit our Enterprise section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

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